Showing posts with label Zain. Show all posts
Showing posts with label Zain. Show all posts

Sunday 22 August 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.

Board of Saudi Zain Proposes Capital Reorganization for Shareholder Vote

Saudi Zain announced on the Tadawwul (Saudi Stock Exchange) today 21 August a plan for a capital reorganisation to be put to a vote at an extraordinary general meeting of shareholders for their ratification subject to the Company obtaining the prior approval of the Saudi Capital Markets Authority, the Ministry of Commerce and Industry and any other concerned body for the plan.

The reorg will take place in two steps:
  1. In the first capital will be decreased.  While it's not stated, this is clearly to eliminated accumulated losses.
  2. In the second a partial restoration of capital.
Here are the details. 

Capital Reduction 
  1. Reduce paid in capital from SAR14,000,000,000 to SAR7,328,843,885.  This covers the accumulated losses of SAR6,671,561,150 as of 2Q10.  2Q10 financials:  Arabic version here and English version here.
  2. There will be a reverse split with shareholders getting 1 share for approximately each 2.096 shares they currently own.  As a result, 667,156,115 shares will be canceled.
  3. Not stated, but the balance represented by these shares SAR6,671,561,150 will be transferred to Accumulated Losses zeroing it out.
Capital Increase
  1. Increase capital by SAR4,383,487,180 to to SAR11,711,926,030.
  2. 438,348,718 new shares are to be issued.  There is no discussion of the offer price.  SZ's nominal (par) value is SAR10 per share.  If the shares are offered for a higher price (at a premium) then SZ will raise more than the SAR4.4 billion.  My guess is that there will be a strong incentive to issue the shares at par given the Company's financial condition and a desire to obtain as close to 100% take-up as possible.
  3. In addition to the normal pro-rata allocation among shareholders, founding shareholders will be able to convert all or part of the debt they've extended the Company.  That amounts to SAR2,914,000,000.  Of that amount Zain Kuwait holds SAR1,859,397,000 (63.8%).  Zain Kuwait holds 25% of SZ's stock and 50% of the Founding Shareholders' portion.  The Saudi General Organisation for Retirement and the Public hold the remainder.
  4. Kuwait Zain's response to the new share offer will give a clear indication of Zain's ability and willingness to continue as a shareholder.  There is perhaps an indication of their attitude in that the SAR2.2 billion 6 month supplier credit SZ obtained in June 2010 was guaranteed by one of the Founding Shareholders, presumably Zain Kuwait.
In a bit I'll post on Saudi Zain and the indications of a turnaround.

Monday 2 August 2010

Al Joman: Analysis of Loans by Kuwait Economic Sectors



Last month the fine folks at Al Joman Center for Economic Consultancy published a series of reports analyzing loans by economic sectors (as defined on the KSE) except for the Banks Sector.

Looking at aggregate sector data, we can get an idea of the relative size of a sector and thus its relative importance in the national economy. 

Also by looking at the relative borrowings by firms within a sector we can get a better understanding of the dynamics of that sector. Is the sector dominated by one or a few firms? Or is competition fairly widespread? Which firms are the major players in a sector? 

In several sectors the largest firms (measured by debt) are fairly small.  This is a reflection of the overall size of the Kuwaiti economy as well as government dominance in certain economic activities.

But, and there is always a "but" with AA, there are some factors which mean any conclusions we draw are imperfect: 
  1. Al Joman's reports are based only on companies whose shares are traded on the KSE. Private firms are not included. 
  2. We're using debt as a proxy for asset size. This ignores equity, though one might argue in a land devoted to OPM debt is not a bad proxy. 
  3. Not all firms have released current financial reports. 
  4. Companies in certain sectors have borrowed for offshore business and investments. Examples are companies in the Investment Sector or in the Services Sector, e.g., Zain or Agility. Thus, there is some external "noise" in the numbers.
But, (a word used almost as often on SAM as "interesting"), we can get a reasonable macro idea or directional perspective from the data we have.

Before we do, some technical "directions" to make your navigation of the reports as useful and easy as possible.  This KSE link will take you to the English language drop down menu for Sectors and the list of companies comprising each Sector. Each company is shown and its Stock Symbol Number. Those SSN's are important (especially for those who don't read Arabic, the language of Al Joman's reports) because the data in Al Joman's report for each Sector is roughly in SSN order. A click of the language button on the right عربي will get you to the Arabic language page. And this link to Al Joman's report page.

Let's begin with an overview via Al Joman's 7 September report - their initial report meant as a macro summary.

All amounts are in KD millions.

Sector31 Mar 1030 Jun 09
Investment  5,747  5,937
Insurance       17       30
Real Estate  1,978  1,835
Industry  1,845  1,853
Services  3,916  4,347
Food     171     198
Parallel Market       65       33
TOTAL13,74014,233
 
As you look in the individual Sector reports, you'll notice that the total loans do not exactly agree to those shown in the above table. The differences are relatively minor and, to repeat myself (another common occurrence at SAM) can be ignored as we are looking for a macro perspective and general "directional" trends. 

For those, like AA, for whom no nit is to small to pick, here is an updated table. No, in an uncharacteristic move, I didn't refoot the detail to make sure these totals tally to the detail.

Sector31 Mar 1030 Jun 09
Investment   5,668  5,937
Insurance        17       30
Real Estate   1,963  1,838
Industry   1,845  1,853
Services   3,936  4,355
Food      171     198
Parallel Market        66       33
TOTAL13,66614,244

Since the first table adds to 13,739 for 31 March 2010, presumably due to rounding, the difference  between the original and adjusted tables is "off" by one.   
 

In the Investment Sector (51 firms) of the 5 largest borrowers 4 are distressed. KIPCO being the one "happy" firm. 

Data in KD million as of 31 March 2010. Total Loans at 1Q10 were KD5,668.

FirmAmount% Total Loans
Investment Dar   96317.0%
KIPCO   61910.9%
Global Investment House   58810.4%
Aayan Leasing    416  7.3%
Aref Investment   339  6.0%
TOTAL2,92551.6%

 

In the Insurance Sector (7 firms) only 3 firms have loans, خليج ت (Gulf Insurance) at KD10.8 and اهلية ت AlAhleia at KD5.3 account for 92.6% of the 1Q10 total. AlAhleia having reduced its borrowings by roughly KD11 from 2Q09. 

In the Real Estate Sector (36 firms) there is no similar dominance. The largest borrower is تمدين ع (Tamdeen) with KD219 or 11.1% of the total as of 1Q10. Al Joman has not reported on لؤلؤة (Lu'lu) Pearl Real Estate or صفاة عالمي (Safat Global). Safat last reported FYE08 when it had KD15. Pearl 3Q09 when it had KD41. If you're looking at the KSE Sector page, note there is no stock with symbol 407. Also Al Joman has جراند (Grand) out of order in its list – using the KSE Symbol Number order as the right one.

In the Industry Sector (28 firms), صناعات (National Industries Group or NI Group) dominates with KD969.7 or 52.6% at 1Q10. The next largest firm أنابيب (Kuwait Pipe Industries and Oil Services Company) has only KD163. 

In the Services Sector (59 firms) زين  (Zain) and أجيليتي (Agility) dominate accounting for roughly 48.6% of total loans at 1Q10 with KD1,556 and KD356 million respectively as compared to 2Q09 when they were 59.1% with KD2,164 and KD411 respectively.

In the Food Sector (6 firms) the aptly named اغذية "Food" (Americana) dominates with roughly 92.2% of 1Q10 loans with KD157.7. And as the slogan now goes "Americana – 100% Arabian".  And note that United Food Industries Group's symbol is almost the same as Americana's, except UFIG has the definite article "أل" in front, i.e., الغذائيةBe careful when placing that order with your broker!

In the Parallel Market (14 firms) صفاة عقار (Safat Real Estate) at KD19.8, ميدان (Maydan) at KD18.3 and عمار (Emaar) at KD11.2 account for 74.5% of 1Q10's total. Again note that the KSE list has gaps missing in the sequential order.  Symbols 2001, 2002, 2004, 2009, and 2016 are not used.

Sunday 9 May 2010

Zain - Turkcell Negotiations with Major Shareholder in Progress


AlQabas reports that an unnamed Bahraini Investment Bank is acting as a middleman between Turkcell and major shareholders.  Starting price talk is KD1.5 per share.  Last time I looked Zain was trading at KD1.3 per share.  If I'm reading the last our words correctly وعند اي سعر  major shareholders sound eager to sell.

The sale results from an urgent need for cash and constrained financing from Kuwaiti banks.

Friday 2 April 2010

Zain's Large Dividend - Bailout for Cash Strapped Shareholders

Copyright Stahlkocher

You've probably heard about Zain's Board's decision to pay out a dividend three times 2009's profits using the cash from the sale of a substantial portion of its African ventures.  Here's The National's account.
“It looks to me like Zain will increasingly be used as a cash-generation machine,” said Irfan Ellam, a vice president of equity research at Al Mal Capital in Dubai.

Mr Ellam said the “highly unusual” payment of a dividend larger than annual profits illustrated that the priorities of the company were shifting from rapid growth to paying returns to shareholders.
And what has prompted this sudden reversal of corporate strategy?  Why is Zain doing this?

A sudden change in the nature of its cash intensive business?  Are capital expenditures no longer a major need in this business?  No.

A sudden change in plans for expansion outside of Kuwait?  A retreat to a Kuwait only strategy ? No.  At least if I've understood correctly.  I though new management's  new strategy was to focus on expansion in the GCC region.   But maybe the plan is to finance regional expansion with high amounts of debt?  This is after all a Kuwaiti company - and national traditions are important.

So what then is the  answer.

Actually it is much much simpler.

In true Kuwaiti style some of Zain's largest shareholders have overextended themselves in "wise" investments.  They now urgently need cash to bail themselves out. The usual source - more  leverage - is not available for a variety of reasons. 

What does one do when one needs cash but one's friendly banker is sitting on his wallet?

Of course, sell an asset.   And generally that means selling the better ones.  Not much market for those assets with great but yet undemonstrated potential.  And no discernible cash inflow.  In fact, it's probably those latter assets which are the source of one's current cashflow problems.

You know those beloved (to Kuwaiti "investors") investments that are long on hockey stick capital appreciation, short on cashflow and which, of course, have been leveraged to the hilt.  "Wise" investments that require cash to unlock those remarkable returns.  And which require cash to service the loans supporting them.

And so real value, tangible value is destroyed in the (as usual) vain hope of creating value in a cloud.  Or in dealing with the torrential financial rain caused by a cloud "burst".

Wednesday 24 February 2010

Saudi Zain 31 December 2009 Earnings Announcement

 

Two announcements from Saudi Zain on 2009 results at the Tadawul (Saudi Stock Exchange) today.  One the commentary.  The second a summary of results.

The commentary on results begins by noting achievements:
  1. 6 million subscribers or 18% market share.  As I posted earlier a very key metric especially in a market with over 100% penetration is spend per subscriber.  Apparently, there are a lot of fairly inactive "chips" in the Kingdom being claimed as subscribers by all the major telecom firms.
  2. Company is offering voice, text and broadband services.
  3. Extension of coverage to 83% of the inhabited areas of the Kingdom.
  4. An gross operating profit of SAR 877 million.  Note this is before other expenses.
  5. Then a quote of the auditors' "emphasis of matter" - which by the way is roughly 64% of the entire commentary so SZ is not putting too much sugar on the news.
Financial results:
  1. Net loss of SAR3.099 billion versus net loss of SAR2,278 billion.  (Recall from my earlier post that amortization of SZ's license fee is a major expense burden).
  2. Loss per share SAR2.21 versus SAR1.63 in 2008.
  3. Gross operating profit of SAR877 million versus SAR16 million in 2008.
  4. Loss from Operations of SAR2.467 billion versus SAR1.7 billion in 2008.
  5. Greater loss due to fact that in 2008 (18 month period) the company was not fully in operations so 2009's cost of operations, marketing, and financing were higher.  While it is noted that for four months out of the extended 2008 reporting period the company had no revenues, clearly operating expenses were the cause for the increase in 2009's loss.
You'll notice that the numbers above differ from those in my earlier post.  That post was based on preliminary numbers.  The final audited numbers are here.
    Other posts on SZ can be accessed using the label "Saudi Zain".

      Monday 22 February 2010

      Saudi Zain and the Mobile Market in Saudi Arabia


      If you're following Saudi Zain, a couple of articles from the Saudi Gazette.

      One on growth in the mobile phone market - a reminder that the number of subscribers is just one bit of the revenue equation, the other being spend per customer.


      And one on a promotion by Mobily.

      And finally a brochure on Markaz's report on the GCC referred to in the second SG article.

      Friday 19 February 2010

      Zain Deal Motives Under Scrutiny


      And the FT does a bit of scrutinizing.

      As to the basic story, this really isn't "news" nor is it a revelation.  Nor was it when you read it earlier here or elsewhere.

      The basic story is Kuwaiti "investor" overextends self while using OPM and high leverage.   

      About as remarkable as the headline "Sun Rises in East". 

      And the point to note is that it is not just one family business group advocating the sale.   Kuwait is blessed with an abundance of "wise" "investors" who overextend themselves with OPM and leverage.

      Wednesday 17 February 2010

      Zain Press Release on Bharti Offer to Purchase African Assets


      Here are the main points from the press release (Arabic only - which is below). Comments in  italics in parentheses are my interpretations.  To be clear: these are not in the press release.
      1. Zain has entered into exclusive negotiations with Bharti over the potential sale of some of its African assets and granted Bharti exclusive rights to conduct due diligence until 25 March 2010.
      2. If I've translated properly, Sudan and Morocco are excluded from the potential purchase.
      3. The potential sales price is US10.7 billion with US$10 billion due on contract and the remainder one year later based on certain conditions (probably earnings targets).
      4. There is a penalty (breakup fee) on both parties of US$150 million if the deal is not completed (with an out no doubt for Bharti related to reasonable due diligence satisfaction).
      5. The sale will have an effect of US$9 billion (not clear why the lower number - minority shareholders?) and after settling obligations the profit impact at a maximum will be US$5 billion which is expected to be realized in 2Q10.  
      6. It's up to the Board and an ordinary general meeting of shareholders to decide whether to distribute the profit or not.  (AA can think of at least two major shareholding groups that will be voting happily to distribute).
      7. Bharti's offer is subject to satisfactory due diligence and obtaining governmental, regulatory and/or similar approvals.


      [7:54:47]  ِ.ايضاح من(زين) بخصوص عرض بيع زين افريقيا ‏
      يعلن سوق الكويت للاوراق المالية انه استلم كتابا من شركة الاتصالات ‏
      المتنقلة (زين) بشان عرض بيع زين افريقيا هذا نصه (بخصوص الموضوع ‏
      اعلاه نود افادتكم بان مجلس ادارة شركة الاتصالات المتنقلة (زين) قد ‏
      وافق على منح المفاوضات الحصرية بخصوص بيع زين افريقيا غير ‏
      شامل كل من السودان والمغرب وحق القيام بالفحص النافي للجهالة حتى ‏
      تاريخ 25-03-2010 وذلك بناءا على العرض المقدم من قبل شركة بهارتي ‏
      ارتل لمتد .‏
      ويتضمن عرض شركة بهارتي قيمة لشركة زين افريقيا بما يقدر ب10,7 ‏
      مليار دولار امريكي على ان يتم دفع مبلغ 10 مليار دولار امريكي عند ‏
      اتمام الصفقة ومن ثم مبلغ 700 مليون دولار امريكي تدفع بعد سنة من ‏
      اتمام الصفقة مع وجود شرط جزائي على الطرفين قدره 150 مليون ‏
      دولار فى حال عدم اتمام الصفقة .وينتج عن ذلك حقوق للمساهمين بحدود ‏
      ِ9 مليار دولار امريكي .‏وبعد سداد التزامات محددة فان الشركة تتوقع ان تبلغ ‏
      العوائد بحد اقصى 5 مليار دولار امريكي ، علما بان هذه العوائد فى ‏
      حال تحقيقها من المتوقع ان تدخل فى حسابات الارباح والخسائر للشركة ‏
      فى الربع الثاني من هذا العام ، اما قرار توزيعها من عدمه فهو قرار يخضع ‏
      لمجلس ادارة الشركة والجمعية العمومية . هذا ويخضع عرض الشركة ‏
      حاليا للفحص النافي للجهالة وسيتم بعدها اخذ الموافقات الرسمية (حكومية ‏
      او هيئات رقابية او ما شابه ذلك) والتوقيع النهائي على مستندات الصفقة ،
      ومن ثم عرضها على مجلس ادارة الشركة لاخذ الموافقة النهائية على اتمام ‏
      الصفقة .) ‏
      هذا وسوف تقوم الشركة بموافاة ادارة السوق باى جديد بهذا الخصوص .‏



      Saudi Zain - Capital Increase RIghts Offering Also Being Considered


      Saudi Zain issued an announcement on the Tadawul today advising that it is considering a Rights Offering as a way of increasing capital.  It seems from this that AlRajhi Bank, Calyon, and Samba have also been engaged for this role as well.

      No mention is made of conversion of debt to equity.  That being said, the first step in a debt conversion would be a rights offering to allow shareholders the right as they have a legally mandated right to any new shares.  I'm guessing that the shareholders will be asked to approve the rights offering and a mechanism to accommodate the debt conversion.

      Saudi Zain Financial and Business Plan for 2010 - Conversion of US$577 Million Debt to Equity


      Saad AlBarrak gave an interview in Riyadh today.  I haven't found anything in the Saudi Press.  The best account so far is from Zawaya Dow Jones.  Unlike other reports like this one from Reuters, ZDJ has much more detail.

      Here are the highlights from the article:
      1. Saudi Zain wants to convert US$577 million of its outstanding debt to equity with the goal of finishing the process before the end of 2010.  Calyon, Samba and AlRajhi Bank have been engaged as advisors.
      2. The ultimate goal is leverage of 50:50.  A structure he described as "the best financial structure". No further loans are being sought at present. 
      3. Conservative projections are for an 80% increase in revenues and 1.5 million new subscribers taking SZ to 7.5 million at FYE 2010. 2010 EBITDA is expected to be positive. 
      4. Mentioning his resignation from Zain (Kuwait), he noted that he will remain as CE of SZ as he is personally committed to the firm.
      5. The US$6 billion license fee paid by SZ is small in consideration of the opportunities in the Kingdom and when scaled for market size a bargain compared to other regional license fees.
      6. SZ will abide by the Saudi Telecoms Authority's prohibition on providing free connections on incoming calls to SZ's customers when they have switched to international roaming.  However, SZ intends to pursue all legal channels to overturn this prohibition.
      And now for the usual comments.

      As a reference points, a link to SZ's 31 December 2009 financialsHere's the updated financial link. You will notice that some of the numbers below do not match those in the financials and that's because I was working with an earlier preliminary set which as you'll notice from the first link no longer are posted.

      First, Uncharacteristically for a self-proclaimed "cashflow guy", let's start with the Balance Sheet.
      1. Over 79% of assets are represented by Intangibles, almost all of which represents the US$ 6 billion (SAR 22.5 billion) license fee.  This is being amortised over the license term.  25 Hijri years (roughly 24.3 Gregorian years).  The license fee is a flat fee, which imposes the same burden whether or not the company is successful.  I don't follow the telecoms market but I do recall that at one point, some countries' license fees were scaled by number of customers the firm got.  The more customers the higher the fee.  The point here is that SZ starts off with a very high fixed cost base.  And note the components of operating leverage - the license fee is 85% of non-current assets. If you're wondering, the Saudi Government has already collected the fee from SZ.
      2. Notes Payable reflect "supplier credits" from Nokia/Siemens for SAR1.6 billion (US$427 million) and Motorola SAR0.6 billion (US$160 million) due within 12 months from 31 December 2009.
      3. Syndicated Murabaha Loan of SAR9.4 billion. SAR7.1 billion in Saudi Riyals and US$710 million in USDollars (SAR2.66 billion).   Arranged by Banque Saudi AlFransi ("BSF").  4.25% over the respective benchmark rate. Bullet (single payment) maturity on 12 August 2012)  This loan refinances a SAR9.1 billion loan which matured 27 July 2009 also be BSF.  One might look at the increase in the loan as providing financing for roughly 50% of the interest due during 2009.  SZ has about 2.5 years before maturity to demonstrate significant progress in its business (particularly in getting additional subscribers) to roll over the loan.  I say that because I expect it won't have the cash flow to repay the loan by then.
      4. From the accumulated losses account under shareholders' equity we can see that the company has yet to be profitable.  Some 38% of original capital has been lost.  One would expect a start-up to have a loss particularly in this business.  The amortization of the license fee is some 34% of the loss so the rest of the losses are from operations.
      Next the income statement.
      1. Let's look at AlBarrak's statement that 2010's EBITDA will be positive.  For our crude estimate, we'll use 4Q09 figures as these probably more accurately reflect the revenue efficiencies associated with reaching 6 million subscribers at FYE 2009.  The Gross Operating Profit Margin is roughly 39.5% (SAR355 million/SAR895 million).  Distribution/marketing and G&A expenses annualized are running SAR1.7 billion.  To break even revenues would have to be SAR4.3 billion.  Annualizing 4Q09 revenues of SAR895 million, we get SAR3.6 billion at a 6 million subscriber level.  Assuming that the additional 25% have a similar spend pattern we get SAR4.5 billion in revenues.    So this doesn't seem like an impossible task.  Of course, seasonality in revenues, increased price competition, etc could throw these calculations off.
      2. When we look at AlBarrak's prediction for an 80% increase in revenues over the full year 2009 figure and using the same assumptions in the point immediately above, SZ would show EBITDA of some SAR 355 million.  A couple of additional comments.  Full year 2009 revenues were SAR 3 billion.  Using 4Q09 revenues, SZ has a SAR3.6 billion run rate so projected 2010 revenues are roughly 151% of the current run rate.  That may make the projected jump a bit more credible.
      3. Net income profitability will take more.  First there is the SAR1.5 billion a year in license fee amortization.  Then the SAR 880 million in financing charges.  
      4. Based on that, I'd guess that profitability is a few years off at the least.  
      5. This explains of course the focus on the debt to equity swap to reduce the interest burden.  The proposed conversion of US$577 million to equity should bring the annual financing charge down roughly 18% or so (based on the assumption of a 6% cost of debt).  By itself this does not solve the company's income statement issues.  Getting more subscribers will.  This probably explains the issue regarding roaming charges.  SZ is competing on price in an effort to snare more subscribers. 
      And finally the cashflow statement.
      1. A key issue will be the need for and amount of  continuing capital expenditures.  Right now SZ is obtaining supplier credit, shareholder support and as well there is a buildup in payables and accrued liabilities.
      2. The issue to watch here and on the balance sheet is whether SZ is riding the trade on these latter two categories and how long it can continue to do so.
      3. Why?  Let's look at how SZ is financing its expenditures.
      4. First, it has net cash from operations of SAR983 million. But this was dependent on increases in payables and accrued liabilities - some SAR2.8 billion.  If this amount comes due for cash payment or further increases are not possible, what other sources of financing does SZ have?
      5. That suggests a look at cash generated from net financing activities.  A positive inflow of SAR817 million in 2009.   But, I'd expect that banks are unlikely to lend more, particularly since SZ is requesting a debt conversion.  Can shareholders continue to provide cash in the form of  additional loans?   Or new equity?  Now that Saad is not on the Board of Zain, will they be as eager to support a company in which they have only 25% equity?  Note that shareholders provided a cool SAR1 billion in 2009 between loans and new equity.   And Zain represents the lion's share of the Shareholder Loans - some 64% of the total and almost all of the increase in 2009.
      The company's financial situation remains fragile - as one would expect of a start-up in a capital intensive business (I'm including the license as a capex).  The solution is growth in subscribers.

      With 25 million or so people in the Kingdom and three other competitors - two of whom -- Saudi Telecom and Mobily have upwards of 80% of the market, SZ has its work cut out for it.  And there is a hungry newcomer on their tail --Bravo.

      Hard for me to see how more than 2 companies can make a profitable "go" in the Kingdom - especially given the license fees.  Profitable in the sense of a good return on equity.  It's that license fee which is the "rub" on that topic.

      Wednesday 10 February 2010

      Zain: A Pro-AlBarrak Article from The National


      The National has an article in favor of Dr. AlBarrak's stewardship.

      The problem is not at Zain.  

      The fundamental problem is simply that some of its Kuwaiti shareholders have characteristically overextended themselves and now need cash.  Typically what would have happened in the past is that  the "investor" would go to a "wise" local bank who would lend him additional money based on what might be charitably described as an optimistic collateral valuation.  No cash flow on the assets  of course but really good assets nonetheless.  Really good.  The Central Bank of Kuwait stopped this game of charades over a year ago by imposing additional lending restrictions.

      So now all that's left to the "investor" is to raid his good investments to bolster other "wise" but less profitable investments or to repay maturing loans.  

      And so value that was created in Zain will be destroyed.

      What's a bit sad is that one (at least I this one) doesn't usually think of MAK Group as being a typical Kuwaiti "investor". 

      That isn't to say of course that Dr. AlBarrak made all the right decisions at Zain or that Zain's strategy was necessary flawless.  But what does a telecoms company in a small market like Kuwait do to build value?

      A couple of other things from the article:
      1. An absolutely brilliant quote from Saad:  “There will be peace with Israel before there is an independent regulator in Kuwait,” he once said in a magazine interview.  Of course unlike the old joke about Gorbachev and God, he did not address when the regulator would be effective.
      2. Another quote this time from The National:  "Kuwait’s practically unregulated stock market does not require investors to disclose their total holdings in a company, including shares controlled by related parties."  Another charitable comment.  There is precious little disclosure required on most topics.  A glance at the websites of listed companies in Kuwait would confirm this.  And for all those out there who advocate less regulation and allowing the market to police itself, there could be no more compelling example of "success" this approach will bring than the KSE.
      3. And another:  "In the past decade, Vavasi has announced a number of multibillion-dollar projects, including a pan-Indian mobile network, an advanced silicon manufacturing facility and an aircraft manufacturing joint venture. None has materialised."   That this ever was taken seriously is a testatment to the truth of yesterday's post Stage #4.  In any case, later this week  we may be announcing Vavasi's participation in the US$1 billion build out of Suq Al Mal.  There will be exciting new features and an overall improvement in your experience here at the site.  And an even more dramatic improvement in Abu Arqala's lifestyle.  Or at least AA hopes so.  With this dramatic change in fortunes imagined, it may be time to submit that loan request to my favorite banker in Kuwait.  Well, actually no, I think Abu Shukry is liable to turn me down.  Luckily, there are "wise" lenders in Kuwait who may not.  And as demonstrated by my postings here, I can take either conventional or "Shari'ah" compliant financing. 

      Thursday 4 February 2010

      More on Zain - Al Barrak Resignation


      The National (Abu Dhabi) attributes Saad's resignation to differences with the AlKharafi Group a major shareholder over the future direction of the company.

      AlQabas (Kuwait) has two reports. 
      1. The first is that AlBarrak has not resigned from Saudi Zain (in which Zain Kuwait owns 25%).  The Chairman of Saudi Zain, Amir Husam Bin Sa'ud AlSa'ud, is quoted as saying that he has not resigned and that he doesn't expect him to lose his seat on Saudi Zain's board.  AlBarrak is CEO at Saudi Zain.  In that article the board of Zain Kuwait is said to be looking to appoint someone with a completely different strategy than the previous incumbent (AlBarrak) in the areas of control over expenses and expansion.
      2. The second is that it's expected that Zain Kuwait will choose Nabil Bin Salama, an ex Minister of Communications to take AlBarrak's place.  At this point I don't believe there's been a formal appointment so this is an unconfirmed report.

      Turning to the strategic differences at Zain Kuwait, as I've written before some shareholders in Kuwait,
      strapped for cash, have been looking to monetize their holdings in Zain to bail them out of current financial difficulties. 

      The first plan was for Zain to sell off its African assets and then dividend the shareholders the proceeds.

      The current plan is for these shareholders to undertake a secondary market transaction and sell the shares to a buyer - the current putative buyer is a consortium of Indian firms.  That seems to be taking a little longer than planned.  Which might raise questions as to whether it is still on track.

      This resignation indicates that there may be a back-up plan to conserve the company's cash - which could be used  perhaps for dividends rather than future investments?

      More in the earlier post (link above).

      Wednesday 3 February 2010

      Zain - Sa'ad Al-Barak Resigns


      There's an announcement on the Kuwait Stock Exchange today that Saad Al Barak has resigned as Vice Chairman/Managing Director.  The announcement says the Chairman will present his resignation to the Board for consideration.  No reasons were given for his departure.

      Here's the notice.

      [11:48:28]  ِ.استقالة العضو المنتدب -نائب رئيس مجلس الادارة فى (زين)‏
      يعلن سوق الكويت للاوراق المالية بان شركة الاتصالات المتنقلة (زين) ‏
      افادت بان العضو المنتدب -نائب رئيس مجلس الادارة فى شركة الاتصالات ‏
      المتنقلة (زين) ،الدكتور سعد حمد البراك قد تقدم باستقالته الى رئيس مجلس ‏
      ادارة الشركة ،وسوف يقوم رئيس مجلس الادارة بعرض الاستقالة على اعضاء ‏
      مجلس الادارة للنظر فيها .‏
      وافادت الشركة بانها سوف تقوم بموافاة السوق باى جديد بهذا الخصوص .‏

      Sunday 31 January 2010

      Saudi Zain Foreign US$500 Million to US$600 Million Loan - What's Behind the News Item?

       

      Kuwait's Al Anba'a newspaper reports that Zain is in discussions with non regional banks for a loan of between US$500 to US$600 million to finance the development and extension of the network of Saudi Zain in the Kingdom.  The reason for the recourse to foreign lenders is ascribed to "tight" lending conditions in the GCC.  You've probably seen all this reported elsewhere.

      But, there's an element to the story that you haven't probably seen.

      The "bit" that many news reports have left out is that the negotiations are being facilitated by equipment suppliers to Zain.  Most of whom are European.  And thus the assumption is that the banks involved are European.  

      Does this indicate anything about Zain's financial condition?

      As mentioned above, the ostensible reason for the recourse to foreign lenders is that local banks are imposing very complicated conditions and requirements for guarantees due to market conditions and due to tighter supervision by central banks.  The unspoken sub-theme is that the credit of Zain is sterling.  But that its access to financing has fallen afoul of external conditions.

      No doubt lending conditions are tighter in the GCC.   Lots of distress with AlGosaibi, Saad, Dubai World has probably focused previously unfocused minds.

      Unmentioned is the simple fact that Zain Saudi has not turned in stellar performance.  Also unmentioned is that it did not make the EBITDA earnings target covenants under its existing loan.  Or that existing lenders on that facility had to grant a waiver to remedy an event of default. 

      Any foreign lender should exercise caution when it is told that the local banks don't understand the credit, aren't as sophisticated as the foreign bank, are over reacting  to market difficulties, or under pressure from allegedly strict regulators.  While it is nice to be told that one is smarter than others,  sometimes a "great" opportunity to take advantage of others' lack of sophistication and nerve is not so great after all.    

      If a prospective lender also notices that the borrower needs to enlist help of others to secure financing, that may also suggest additional caution is prudent.  If the borrower cannot find any banks who "know" it who are willing to lend (and note the article says that negotiations with local banks for financing this new loan have stopped), then could be another red flag.  Having said this, once a firm I was with extended a financing offer to a prospect whose lead bank was unable to providing financing, though this was a skill set deficit not a credit issue.  We then became the lead bank.

      Equipment suppliers have a keen interest in moving their merchandise.  And to the extent they can lock in a buyer to their equipment or increase "switching costs", all the better.  When their customers can't raise financing on their own, suppliers first turn to other sources of credit, e.g., export credit agencies, and financiers they know.  Often leaning on those sources to do the deal, explaining just how important it is to them and promising they won't forget.   Sometimes, as a last resort, they will even take the receivables on their own books.  During the "Asian Century" (which if I remember correctly began in the early 1990's and abruptly ended in 1997, though I believe it may have restarted again in 2009) one French and one US supplier found themselves later to their financial chagrin with a lot of duff receivables - which may in part have motivated a merger.

      Another bit of information in the article which may be an indication of distress (though it need not necessarily be) is the statement attributed to the CEO of Zain Saudi, Saad AlBarak, that Saudi Zain was not "rescheduling" its existing murabaha loan but merely "refinancing" it.  

      A refinancing certainly sounds much better than a rescheduling.  A rescheduling implies all sorts of problems.  A refinancing, well that's just the rollover of a great asset.  

      The devil is as usual in the details.  If the existing lenders were to say "no",  is the alternative a rescheduling? Are there any new lenders ready to step up and "take out" some or all of the existing lenders?  Sometimes when a bank is stuck in a credit, it "refinances" rather than "reschedules" because reschedulings raise all sorts of  messy problems.  First, there is the need to report restructured loans under IFRS.   Auditors may insist on impairment tests.  Provisions may become necessary.  Second, as a general rule, Central Banks get nosy about rescheduled loans and start asking about provisions as well.  Third, equity analysts may form unfortunate conclusions if restructured loans increase.  Something one might want to avoid if one faces other loan problems.  Fourth, clients and depositors may get nervous.

      And sometimes a refinancing is just that - bankers renewing a performing asset that they are happy to have on their books.

      So, to be clear, all of the above do not prove there are serious problems at Saudi Zain.  

      What they do suggest, however, is that a closer look at the company is warranted.

      Sunday 24 January 2010

      Saudi Zain - Just What Did It Miss? Financial Covenants Not Payments



      You've probably seen reports that Saudi Zain missed "commitments" under its US$2.6 billion  equivalent "Islamic" facility.  The natural assumption was that these were monetary commitments, e.g., principal or interest payments.

      On Saturday, Saudi Zain's CEO, Saad AlBarak, told AlArabiyya that Saudi Zain missed certain EBITDA targets mandated by the facility.  Zain's lenders have waived the breach of the covenants in 2009 and required the company to provide a revised set of targets for 2010 for their approval.

      EBITDA is bankerspeak shorthand for earnings before  (the payment) of interest, taxes, depreciation and amortization.  EBITDA is an attempt to capture the ongoing operating cashflow of a company.   Loans and other debts are settled with cash not net income which is accrual based and can often differ significantly from the firm's actual cashflow.  

      Lenders include covenants like EBITDA targets as requirements in loan agreements for two reasons.

      First, they provide a set of monitoring tools of the company's performance.  In this  case, the EBITDA targets help lenders to determine if the company is earning enough money to settle its obligations, including their loans.  

      Second, since these are covenants, a failure to meet them by the company constitutes an event of default under the facility.  In that case banks have the right (but are not obliged to) to declare the borrower in default and accelerate the due date of the loan.  There are two reasons for using such covenants.  First, the covenants and the threat they might be used will focus the borrower's management on doing their utmost to make the company perform.  Second,  if the borrower does not meet the target, the banks have the right to accelerate the loan, if they want.  In such a case they can  require immediate repayment before value in the company is eroded.

      It really does pay to be careful with press releases that contain disclosure that one has missed a covenant.  For some inexplicable reason the market gets excited about that sort of thing.  And when the wording lacks clarity the market imagines the worst.  It's also doubly important when one's auditor has included a matter of emphasis statement in his report as this should make any sentient creditor nervous. 

      One might state that this sort of poor communication shouldn't happen.  As an old hand in the region, AA has gotten to the point of just hoping that it doesn't occur.

      Thursday 3 December 2009

      BNSL Puts Zain Deal on Hold

      There's no joy in Kuwait tonight as some important people up there were counting on this sale to help them with urgent cashflow needs.

      And even less joy if they read this account.  The parties to the sale might not be serious in terms of intent.  Even more disturbing some of them might not be serious players in terms of capacity.  AA once broke a  financially strapped client's heart by telling him that his rich Arab white knight had only one of those three attributes.

      Why this sale is important for a variety of reasons in explained in my earlier post here.

      Thursday 19 November 2009

      Zain Share Price and KSE Decline - What are the Implications?

      There has been a lot of analysis about the decline in Zain shares and the implications for the Kuwaiti market.  Usually along the lines of the importance of Zain's volume.  Here's one from AlphaDinar.  A good explanation of the key role played by the blue chip Zain.

      What I'd like to do is look at the implications of a prolonged decline in Zain's share price and in the KSE  on local borrowing and debt service.

      First an introduction to set the stage.

      Anyone familiar with the term "Kuwaiti investor" also knows that this term is generally associated with the terms  "capital appreciation", "OPM",  "leverage",  and "collateral".   And only rarely with the concept "cashflow from operations".

      Let's deal with these one by one.
      1. Capital Appreciation - The typical Kuwaiti investor has a unique "appreciation" for the strong potential of his assets to increase in value.   Cashflow is generally a secondary consideration if at all.  The belief is that in the not-too-distant future one will be able to sell one's assets to another party at a substantial premium. A trade sale.  A primary market sale or IPO.
      2. OPM - Other Peoples' Money - especially bank debt - is always preferable when funding investments. If something unexpectedly goes wrong, one has not committed one's own capital to the  full entry price.
      3. Leverage - The more that one can lever one's investment the higher the IRR.   And the more one can lever one's equity into multiple investments, the richer one can become  Also, if as is typical one's investments have no appreciable cashflow,  the ability to secure additional borrowings is a lifesaver when it comes time to pay the interest on the original loans.  As you'd expect, this works really well in a rising market.  The lender believes it has extra collateral and so can extend another loan.  Local lenders  too share the appreciation of capital appreciation.   In a small overbanked market like Kuwait, it is also difficult to get new customers.  A bank grows with its existing customers - one way or another.  And what bank does not want to grow its bottom line and balance sheet?  But a key risk is overlooked:  cash funded debt is being based  primarily on paper increases in value  - which are subject to negative as well as positive investor sentiment.   
      4. Collateral - The way to get leverage is to pledge one's assets.   And to the extent that the same asset can be used to support more than one loan the higher one's leverage.   As the asset increases in value, one gives a second lien to another hungry banker and then builds a whole new pyramid of investments. And this brings us back to another virtue of using OPM:  in the event of a problem  with an investment, the investor (borrower) can simply walk away surrendering the asset to the lender. 
      The result is an inverted pyramid of investments fundamentally supported by growing debt.

      Second, now to the analysis.

      What could go wrong?
      1. In 4Q07 the Central Bank of Kuwait tightened the calculation for 80% loans to deposits ratio moving from a month-end basis to a daily average basis.  (Page 36 here).  In 1Q08, in an effort to control inflation, the CBK pushed banks to lower commercial and consumer lending.  The money tap was turned to a trickle.
      2. In 3Q08, the global financial crisis hit.  Foreign banks began restricting loans.  As the tide of liquidity flowed out, asset values declined.  
      3. A double barreled effect.  Not only were new funds cut off.  But as asset values declined, collateral values for existing facilities eroded.  Lenders began demanding reductions in principal of loans.  And banks might demand that interest actually be paid.
      Where to get the cash?

      One turns to one's best asset.  One that actually generates cashflow.  For example, Zain.

      Plan A was to try to sell off a division or two (initial focus Africa).  Sales proceeds could be dividended to "needy" shareholders. 


      So Plan B is to sell a stake to a strategic investor.  Recently Zain shareholder(s) announced the sale of 46% of existing shares to a collection of  Indian investors "Vivasi Group".   Note:  Zain is not issuing new shares to fund expansion.  Existing shareholders are cashing out to get needed cash.

      The problem is with Zain's share price down to KD0.960 (Market Cap KD3.93 billion US$13.8 billion - down 50+%) Plan B gets more difficult.  Just this week, BSNL announced that it saw the need to renegotiate the price.  As you might guess, they're not offering to pay more.

      The problem is further compounded because as the market drifts lower more investors' collateral is worth less.  Lower collateral cover is generally accompanied by higher banker anxiety and demands for additional collateral or cash.  This affects not just individuals but corporate entities - like the investment companies.  Or the "industrial" companies in the country many of whom only had profitable years in the past because of their investment portfolios.   Let me emphasize that point to make sure it's clear:  their actual business operations did not turn a profit.  They only made a profit because of   (paper) investment income.

      With that as background the import of the decline in Zain and the KSE is outlined in stark fashion.