Kuwait-based telecoms service providers Zain Group and Wataniya Group reported weak financial results for the full year ended December 2012. Zain reported a 12.7% y-o-y decline in full - year profits for 2012, while Wataniya reported an even steeper profits decline for the same period at 22%. These results, which mask healthy subscription gain s by both operators, reflect a combination of industry-specific risks in their domestic market and macroeconomic risks in their international operations.
Zain: Top-Line & Bottom-Line Figures Head South
Zain reported consolidated revenues of US$4.58bn for the full year ended December 2012, a decline of 4.6% compared to the previous year's revenue of US$4.79bn. The company also reported a 6% and 12.7% decline in EBITDA and net profits over the same period to US$2.04bn and US$902mn respec tively. EBITDA margin fell slightly to 44.5% in 2012, from 45% in 2011. Zain has begun the process of integrating the financials of its loss-making Saudi unit into its consolidated results after increasing its stake in the company to 37% following a rights issue in 2012 , although it did not disclose the impact of this move on its bottom - line figures .
|Financial Indicators Underperform|
|Zain (LHS) And Wataniya (RHS) Financial Indicators (US$bn)|
Wataniya: Weak Bottom-Line Figures Mask Revenue Growth
Wataniya's performance was no better than its larger rival, with annual profits falling by 22% y-o-y to KWD75.5mn (US$266mn) compared to KWD96.8mn (excluding a fair value gain of KWD265.3mn from the increase of its stake in Tunisiana from 50% to 75%) in 2011. The company's EBITDA followed a similar trend, albeit to a lesser degree, falling by 4.7% y-o-y to KWD299.4mn from KWD314.2mn in 2011. However, these results masked a respectable 2.2% y-o-y increase in consolidated revenue to KWD742.5mn, compared to KWD726.6mn in the previous year.
Local And International Market Risks Abound
Zain and Wataniya face similar challenges across their local and international operations. The domestic market is characterised by slow , declining subs criber growth due to market saturation and intense competition, particularly after the arrival of STC -owned VIVA Kuwait in late 2008. Wataniya's domestic revenues fell by almost a tenth in 2012, reflecting the impact of promotional activities aimed at defending its market against VIVA's aggressive growth in recent years. Zain was yet to provide a breakdown for its domestic revenues at the time of writing. However, we expect it to follow the same trend as Wataniya considering the operator recorded a 4.6% decline in 9M12 revenues compared to the previous year.
|International Units Drive Subscriptions Growth|
|Zain And Wataniya Consolidated Subscriptions (mn)|
The downward pressure on the operators' revenues and profits in the Kuwaiti market is set to continue because of competition dynamics in the mobile sector. Meanwhile, the government's tight control of the fixed-line sector, through the Ministry of Communications (MoC), limits the opportunities for the operators to diversify their service offerings with higher value converged solutions for corporate and residential customers. That said, Kuwait's three mobile operators have begun to ramp up their mobile data offerings with the deployment of 4G LTE services following the allocation of spectrum in H212. We expect this to boost their top-line figures in the short term, but caution that profit margins will remain under pressure from intense competition in the mobile market.
In addition to their domestic woes, Zain and Wataniya also face macroeconomic challenges in their high-growth international markets in the form of forex losses. Zain attributes its weak performance to forex losses from Sudan, which saw its currency fall by around 55% against the US dollar during 2012. For its part, Wataniya revealed an 11.1% depreciation of the Tunisian dinar relative to the US dollar was mainly to blame for its weak revenue and net profit results from that country.
Despite the currency risks, BMI believes Zain and Wataniya's international operations still offer the best prospects for long-term growth. Zain has operations in frontier markets Iraq, Sudan and South Sudan, while Wataniya has a footprint in Algeria, Tunisia and the West Bank. Mobile data services are still at an elementary stage in these countries and both operators are well placed to take advantage of the expected growth in high-value services in the future. Their overall performance in these markets therefore depends on their ability to properly manage the macroeconomic risks in the market, while benefiting from strong industry fundamentals.