Saturday, August 21, 2010

Saudi Zain: Indications of Turnaround - Though It's Not There Yet


In reviewing the 1H10 results of Gulf Finance House, Global Investment House, and Shuaa, I've commented that the only signs of a turnaround that I could detect were comments in the accompanying press releases where such a happy event was more a case of wishing than doing.

So what does a real turnaround look like?

As I've said before, the major sign is in the Company's ability to generate revenue.

Let's look at Saudi Zain for indications of a turnaround.  Note, that doesn't mean there has been a turnaround.  There hasn't.  SZ is still bleeding rather profusely - roughly SAR1.3 billion loss for 1H10 versus SAR1.6 billion for 1H09.

As the first step the usual link to the 2Q10  financial reports:  Arabic version here and English version here.

But there are some positive signs:
  1. 1H10 Revenues of SAR2.545 billion a 98% increase over 1H09's SAR1.283 billion.
  2. 2Q10 Revenues of SAR1.450 billion 106% more than 2Q09's SAR0.702 billion.
  3. 1H10 Gross Operating Income of SAR992.374 million a 256% improvement over 1H09's SAR278.573 million.
  4. 2Q10 Gross Operating Income of SAR608 million - 358% over 2Q09's SAR133 million.
  5. Gross Operating Margin at 39% (1H10) and at 42% (2Q10) versus 22% (1H09) and 19% (2Q09).
This was accompanied by a reduction in expenses of 45% in 1H10 and 56% for 2Q10 versus the comparable periods the year earlier.

Is SZ out of the proverbial woods yet?  No, it's not. 
  1. Financing expenses (read interest) are up significantly.  1H10 SAR545 million (2009: SAR261 million) and 2Q10 SAR317 million (2009: SAR 150 million).  Roughly doubled.
  2. It has a matter of emphasis from its auditor (PwC) on the going concern assumption.  (Note #1).  Important because of the impact on lender, supplier, and shareholder sentiment.
  3. It still has a very significant debt burden, including SAR2.2 billion provided by BNP in June 2010 with maturity December 2010.  A reason why the rights issue is of key importance.  Plus an SAR9.75 billion Murabaha facility due (bullet payment) August 2011.
Key questions are its ability:
  1. To continue to grow revenues while maintaining a reasonable gross operating margin.
  2. To maintain expense discipline.
  3. To restructure its liabilities by a significant increase in capital which, if successful, should reduce financing costs by reducing the quantum of debt as well as hopefully the interest margin on the remaining post reorg debt.
Those questions can't be answered now.  But there are some positive signs - certainly better than at the companies cited above.

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