Mobile Telecommunications Co. (ZAIN.

KSE)

Country: Kuwait Current Market Price (KWD) 4.140

YTD Stock Performance % 8.4%
Exchange: Kuwait Stock Exchange
Outstanding Shares (In million) 1,858.71
Sector: Telecom and IT Market Cap (KWD Million) 7,695.06

Local Ticker: ZAIN EPS (KWD) 0.17 P/E 24.01

Reuters Code: ZAIN.KSE BVPS (KWD) 0.85 P/B 4.86
Adj. DPS (KWD) 0.07 Dividend Yield (%) 1.6
Investment Opinion: OVERWEIGHT
Last traded Price: KWD 4.140 (as on February 27, 52-week High (KWD) 4.98 52-week Low (KWD) 2.72
2008) Source: Kuwait Stock Exchange, Zawya.com
Fair Value: KWD 4.644

Products & Services: Purchase, supply, installation,

management and maintenance of mobile telephone
and paging systems.

Share Price Movement

ZAIN vs. KSE Index

ƒ Zain, formerly known as Mobile

Telecommunications Co. (MTC), is the
Middle East’s first mobile operator and the
second largest Kuwaiti company in terms of
market capitalization.
ƒ The company is expanding its operations
into less exploited mobile markets, such as
Iraq and Lebanon, where growth prospects
are relatively higher.
ƒ Zain’s total subscriber base surged 56.8% to
42.39 million in 2007 as compared to 27.04
million in the earlier year.
ƒ By 2011, the company hopes to book a
customer base of at least 110 million and
EBITDA of USD 6 billion. Further, it aims to
become one of the world’s top ten mobile
operators through its ACE strategy.
ƒ The liberalization of the Kuwaiti telecom
sector and the entry of Saudi Telecom
Company represent potential threats to the
company’s market position.
ƒ Offsetting Zain’s growth drivers against risk
factors, we raise our 12-month price target
to KWD 4.644 from KWD 4.100, while
reiterating our OVERWEIGHT
recommendation on the stock.

Call us on +973 17549485 or email us at research@taib.com

 Background

Zain was established in Kuwait as Mobile Telecommunications Co. (MTC) in 1983. The region’s first
mobile operator has today grown into the largest Kuwaiti company in terms of market capitalization.
MTC re-branded as Zain. On September 8, 2007, the company underwent a makeover and adopted ‘Zain’ as its new corporate
master brand name. Earlier, in December 1999, it was dealt a vicious blow when it lost its monopoly to
Wataniya, which bagged the country’s second mobile license. Zain is involved in the business of
mobile telecommunications, including the purchase, delivery, installation, management and
maintenance of mobile phones and paging systems.

Since the initiation of its profitable expansion strategy ‘3x3x3’ in 2003, Zain has grown exponentially -
it is the fourth largest telecommunications company in the world in terms of geographic presence.
Currently, the company is present in seven Middle Eastern and 15 sub-Saharan African countries with
over 15,000 employees. In the Middle East, it operates under the Zain brand name in Kuwait, Bahrain,
Iraq, Jordan and Sudan. In Lebanon it is known as MTC-Touch. In Africa, it functions as the Celtel
A global presence.
brand in 14 sub-Saharan African countries. In 2007, Zain acquired 75% of Westel Ghana, Ghana’s
second national operator. In the same year, it also won the third GSM license in Saudi Arabia. The
company plans to commence operations in Saudi Arabia and in Ghana by the second half of this year.

In 2007, Zain’s African operations registered a 59% increase in subscriber base, while in the Middle
East it surged 53.1%. Consequently, its total active customers for the year climbed 56.8% to 42.39
million as compared to 27.04 million in 2006. On February 21, 2008, the company proposed to
distribute 90% cash dividend, 50% stock dividend and a 75% rights issue.

Zain has several firsts to its credit. In 1994, it introduced GSM in Kuwait - among the first in the region
to do so. It was also the first company to introduce prepaid services in 1999. It is a pioneer in
3G/EDGE nationwide network, which was initiated in 2003, through MTC Vodafone-Bahrain. In
December 2005, it initiated the first video call between Kuwait and Bahrain. In September 2006, Zain’s
A path breaker. subsidiary Celtel launched ‘One Network’, the world's first borderless network across East Africa.
Later, Celtel announced the extension of the ‘One Network’ service to six other countries namely
Burkina Faso, Chad, Malawi, Niger, Nigeria, and Sudan. Zain won the ITP 2007 Arabian Business
Magazine award for the ‘Best Operator’ in Kuwait’s business sector category in March 2007 in
recognition of its contribution to the development of the country’s wireless telecom sector. In early
September 2007, the Group won three prestigious industry honors from CommsMEA Awards,
including ‘Overall Operator of the Year’ among both fixed line and mobile service operators and
‘Telecom Service of the Year’ for One Network.

For the year 2007, Zain recorded a net profit of KWD 320.46 million compared to KWD 294.98 million
Moderate performance in in the previous year - an increase of KWD 25.47 million (8.6%). Consequently, basic earnings per
2007. share (EPS) increased to 172 fils.

Board of Directors

Zain’s Board of Directors comprises seven members. Mr. Asa’ad Al Banwan has been the Chairman
of the company since March 21, 2005. The rest of the board members are as follows:

Chaired by Mr. Asa’ad Al Name Designation

Banwan.

Dr. Saad Hamad Al Barrak Deputy Chairman and Managing Director (CEO)

Mr. Abdul Aziz Al Nafisi Director

Mr. Meshal Al Hama’ad Director

Mr. Abdul Mohsen Al Faris Director

Mr. Jamal Al Kandary Director

Sheikh Khalifa Al Sabah Director


Kuwait Investment
Authority holds 24.60%
shares.
Global cellular subscribers
stand at 3.3 billion.
Major Shareholders and Affiliates
The Kuwait Investment Authority holds a 24.60% stake in Zain; the rest is with other investors. Both
GCC and foreign investors have access to 100% of Zain’s share capital.
Shareholding Pattern
24.60%
75.40%
Kuwait Investment Authority Others
In turn, Zain has made investments in a number of subsidiaries and affiliates. It holds 100% stakes in
various companies via Celtel International, MTC International, and Pella Investment Company.
WHOLLY-OWNED SUBSIDIARIES COUNTRY % SHARE
MTC International Netherlands 100.00%
Mobile Telecommunications Company Lebanon Lebanon 100.00%
Sudanese Mobile Telephone Company (via Celtel International) Sudan 100.00%
Celtel Burkina Faso S.A Burkina Faso 100.00%
Celtel Chad S.A (via Celtel International) Chad 100.00%
Celtel Malawi Limited Malawi 100.00%
Celtel Limited Uganda Uganda 100.00%
Celtel (S.L) Limited Sierra Leone 100.00%
Celtel Madagascar SA Madagascar 100.00%
The Industry Scenario
Global
Telecommunications is one of the fastest growing sectors in the world. Currently, there are 3.3 billion
cellular subscribers globally, of which 77.9% are GSM (Global System for Mobile communications)
subscribers. An increase of 1.5 billion mobile subscribers is anticipated in the next four years, which
would bring the overall penetration rate to 75% by 2011. On the flip side, annual subscription growth is
estimated to come down to 12.7% in 2008 from 18.6% last year, while the world’s mobile-subscription
penetration is expected to go up to 55.8% as against 50% in 2007. Subsequently, growth in revenues
of the mobile segment is estimated to decline to 44% in the current year from 50% in 2007.
 MENA

During the last decade, the mobile telecom industry in the MENA region experienced significant
changes as subscriber bases burgeoned and fixed line carriers lost their monopoly. Over the next 10
years, the subscriber base for mobile users is expected to double, reaching approximately 400 million
MENA’s subscriber base to
by 2017 from 200 million in 2007. Escalating intensity in business development is translating into
double in a decade.
acquisition of new licenses and/or enhancing existing operations regionally and internationally. In the
past three years, more than USD 55 billion has been spent on merger and acquisition (M&A)
transactions, at an annual growth rate of 20%. According to experts, the telecommunication and
broadband internet sector in the MENA region is expected to generate annual revenues of USD 70
billion by 2015. Further, in most of the African countries in which Zain operates, the sector offers
immense growth opportunities as the penetration level is relatively low.

GCC

GCC to spend USD 375
billion on telecom over the
next decade.
In the GCC, the telecom industry has been especially buoyant in the last couple of years, fuelled by
strong economic fundamentals, a young population, and government reforms toward liberalization.
This expansion is more evident in the mobile segment, which grew exponentially to 76% in 2006 as
compared to 41% in 2003; it is expected to exceed 85% in the next three years on rising demand for
GSM services. Among the GCC countries, the highest penetration rates were recorded in Bahrain,
the UAE, Saudi Arabia, and Qatar, where levels have already exceeded 100%. The regional telecom
sector is expected to see a spurt of M&As to achieve greater efficiencies in services and cost, on the
back of globalization and challenges from corporate giants. This can be evidenced from the fact that
in the first four months of 2007, regional telecom operators raised USD 14.7 billion from investors to
support expansion and acquisition. According to industry experts, the GCC countries are anticipated
to spend up to USD 375 billion on telecom and related infrastructure over the next decade.

Snapshot of the Middle East and African Telecom Sector (2007)

Country Population (‘000) Penetration Peers Zain’s Position GDP/capita (PPP)

Kuwait 3,400 106% 1 1 USD 34,200
Sudan 38,500 18% 3 1 USD 2,930
Jordan 5,900 83% 3 1 USD 5,900
Nigeria 146,200 30% 3 2 USD 1,310
Congo Brazzaville 3,800 34% 1 1 USD 1,290
Zambia 11,900 19% 2 1 USD 1,320
Gabon 1,300 81% 2 1 USD 8,910
Tanzania 39,700 21% 3 2 USD 1,390
Iraq 28,900 34% 2 1 USD 3,050
Bahrain 800 144% 1 2 USD 28,730
DR Congo 59,300 10% 4 1 USD 143
Lebanon 4,100 30% 1 - USD 7,850
Kenya 37,500 34% 1 2 USD 1,550

Kuwait

In 2007, the Kuwaiti cellular market witnessed a growth of 9.9% to reach 2.78 million subscribers and
total market revenues amounted to USD 2.04 billion. Kuwait was the first country in the GCC to
introduce a second telecom operator and is one of the best-penetrated markets in the Middle-East.
However, the market is maturing with the current mobile penetration level at over 106%. In 2007, the
country’s population stood at around 3.4 million, which is projected to reach 5.63 million by 2030.
Simultaneously, Kuwait’s mobile phone penetration is forecast to rise to 115% by 2012. In tandem
Cellular subscribers grew
with the dynamic scenario, the government approved a third mobile operator in December 2006. On
9.6% in Kuwait.
November 27, 2007, Saudi Telecom Company (STC) won the public auction for a third mobile-phone
license, acquiring a 26% stake in the new mobile-phone company being set up by the Kuwaiti
government. The emergence of STC is expected to change Kuwait’s competitive landscape. It has
already prodded both Zain and Wataniya to focus on regional expansion.
 On the internet front, according to the United Nations Development Program (UNDP), Kuwait had 228
internet users per 1000 people in 2003, compared to 275 in the UAE and 67 in Saudi Arabia. In 2006,
the country’s penetration level was similar to those of the other GCC countries. Increasing broadband
access in homes and businesses has led to the existence of more than 300 licensed internet cafes
and entertainment centers that offer internet services.

Peer Analysis

In KWD Zain Wataniya*

Total Revenue (million) 1,677.27 407.6
Net profit (million) 320.46 80.7
EBITDA (million) 691.54 161.2
EBITDA margin 41.2% 39.5%
Mobile subscribers (2007) (million) 1.58 9.54
Market share - mobile (2007) 56.8% 43.2%
Subscriber growth (from 2006-07) 8.2% 12.1%
*Figures from Wataniya press release.

Asset Structure

In 2007, Zain’s asset structure surged 25.1% to KWD 4.37 billion from KWD 3.49 billion in the earlier
year. The share of non-current assets in total assets climbed to 87.3% from 80.2%, while current
assets declined to 12.7% from 19.8%. The composition of non-current assets was heavily tilted
Total assets grew 25.1%. towards property & equipment and intangible assets. During the year, property & equipment surged
32.2% to KWD 1.50 billion, while intangible assets grew 10.8% to KWD 1.64 billion. Investment in
associates increased to KWD 0.26 billion as against KWD 8.02 million, mainly driven by the
company’s capital contribution which stood at KWD 269.31 million as against KWD 0.45 million in
2006. Further, the parent company granted a loan worth USD 625 million to its associate MTC Atheer,
which carries an interest rate of 2.5% over ‘LIBOR’.

Within current assets, cash & bank balance tumbled 44.9% to KWD 261.26 million from KWD 474.32
million in 2006. The fall coincides with an increase in trade & other receivables, which climbed 33.5%
to KWD 246.28 million from KWD 184.49 million. Consequently, its contribution to total assets
increased to 5.6% from 5.3%. Among the geographic segments, assets allocated to the domestic
segment comprise 34.9% of total assets as against 65.1% apportioned to the others.

Asset Structure of Zain

10.7% 6.0% 5.6%

5.9%

37.5%
34.2%

Cash and bank balance Trade and other receivables Investment in associates
Property and equipment Intangible assets Others
 Capital Structure

For the year 2007, Zain’s total equity increased by 16.5% to KWD 1.75 billion from KWD 1.50 billion in
2006. Of this, KWD 0.17 billion belonged to minority interest holders, representing a 14% growth over
Shareholders equity grew last year. The company’s legal reserve surged 50.1% to KWD 94.70 million, while retained earnings
to KWD 1.58 billion. grew 21.7% to KWD 571.94 million. During the year, the company’s total debt swelled 43.7% to KWD
1.99 billion from KWD 1.38 billion. Consequently, its total debt to equity ratio increased to 125.5% from
102.0% in 2006.

In 2007, the company’s paid up share capital grew to KWD 0.19 billion from KWD 0.13 billion, a 50.1%
growth as a result of a 50% bonus issue and the allocation of 1,250,195 shares to employees under
the Employee Share Option Plan (ESOP). As a result, the number of outstanding shares increased to
1.89 billion (worth 100 fils each) from 1.26 billion in 2006. Zain plans to increase its capital further
through bonus as well as right issues. On February 21, 2008, the company proposed to distribute 90%
cash dividend and 50% stock dividend for the year 2007. It also proposed a 75% rights issue at a price
of KWD 0.85 per share (premium of KWD 0.75). Accordingly, the company’s outstanding shares would
Plans to increase capital. increase to 4.23 billion from the current 1.89 billion. The increase in capital would not only significantly
reduce borrowing costs in the short-term but also allow the company to enhance its leverage.

Capital Structure of Zain

0.70
0.60
in KWD billions

0.50
0.40
0.30
0.20
0.10
0.00
Share capital Reserve Retained earnings

2007 2006

Recent Performance

For the year 2007, Zain’s net profit grew a moderate 8.6% to KWD 320.46 million from KWD 294.98
million, translating into earnings per share of 172 fils. However, net profit margin declined to 19.1%
Net profit grew 8.6% in
from 22.7%. In addition, both return on equity (ROE) and return on assets (ROA) decreased to 20.3%
2007.
and 7.3% as against 21.8% and 8.4%, respectively, in the previous year.

Recent Performance

1,800.00 25.0%
1,600.00
20.0%
in KWD millions

1,400.00
1,200.00
1,000.00 15.0%
800.00
10.0%
600.00
400.00 5.0%
200.00
0.00 0.0%
2007 2006

Revenue Net profit ROA ROE

 During the year, Zain’s total active customers surged 56.8% to 42.39 million from 27.04 million in
2006. Consequently, revenues saw a rise of 29.3% to KWD 1.68 billion from KWD 1.30 billion. Though
the company’s cost of revenues increased 31.7% to KWD 0.36 billion, gross profit climbed 28.6% to
KWD 1.32 billion. Concurrently with the spike in total subscribers and revenues, operating expenses
Total active customers climbed significantly. Distribution, marketing & operating expenses soared 39.7% to KWD 0.48 billion,
surged 56.8%. while general & administrative expenses scaled 32.6% to KWD 0.15 billion. EBITDA expanded 21.3%
to KWD 0.69 billion. However, EBITDA margin shrank to 41.2% from 43.9% in 2006.

The company’s remarkable customer growth was primarily driven by its African operations. As on
December 31, 2007, Zain’s African operations represented 63% of its total active customers, while
Middle East operations comprised 36.7%. The company intends to attract at least 110 million
customers by 2011, thereby achieving an EBITDA of USD 6 billion. However, its financial performance
in 2007 was fueled by its more mature Middle Eastern operations. This can be evidenced from the fact
that its Middle Eastern operations registered a net profit of KWD 0.33 billion, up 17.8%, while its sub-
Saharan operations registered a net loss KWD 0.10 billion, even though revenues climbed 50.7% to
KWD 0.90 billion due to competition in Kenya.

Customer Segmentation

1.1%
16.9%
4.4%
3.7%

1.5%
63.3% 9.2%

Bahrain Iraq Jordan Kuwait Lebanon Sudan Africa

Zain leads the Global System for Mobile Communication (GSM) segment in Kuwait with a market
share of 56.8%, while Wataniya accounts for the balance. In 2007, the company’s average revenue
per user (ARPU) in Kuwait increased to USD 70 from USD 65. However, it registered a net loss of
USD 21.7 million in Kenya on account of intense competition from Safaricom. On the other hand, Zain
was able to increase its market share in Kenya to 33% from 28%. Despite intense competition, Zain
holds the number one position in most of the countries in which it operates.

Country Revenues (USD mn) Net profit (USD mn) CAPEX (USD mn) ARPU (USD) Market share

Kuwait 1,266.8 592.3 132 70 57%

Sudan 792.5 263.2 101 20 49%
Jordan 477 119.2 23 19 43%
Nigeria 1,171.9 83.2 575 12 29%
Congo Brazzaville 211.3 66.1 57 20 76%
Zambia 252.1 58 97 12 79%
Gabon 233.1 52.8 111 33 63%
Tanzania 265 52.1 135 11 39%
Iraq 561 46.6 198 13 70%
Bahrain 151.1 29.3 34 42 44%
DR Congo 296.7 25.9 130 12 41%
Lebanon 60.9 9.5 0 NA 50%
Kenya 194.3 -21.7 63 7 33%
 New Projects and Strategy

Zain is actively looking for acquisition and expansion opportunities to further drive growth. In January
2007, the Group launched the ACE (Acceleration, Consolidation, Expansion) strategy to realize its
‘3x3x3’ vision of becoming a top-ten global mobile operator by 2011. It also intends to acquire at least
110 billion customers and EBITDA of USD 6 billion in the next three years. On October 22, 2007,
Celtel agreed to acquire 75% of Western Telesystems Ltd. (Westel) from the Government of Ghana
Printing footsteps across for USD 120 million. Through Westel, Ghana’s second national operator licensed to provide fixed and
geographies. mobile (GSM) telecommunications services, Zain aims to launch enhanced telecom services in the
nation. Again in 2007, it won the third GSM license in Saudi Arabia, thereby acquiring 25% of the new
company to be set up, for which it agreed to pay USD 6.11 billion. Zain is gearing up to commence
operations in Saudi Arabia as well as in Ghana by the second half of 2008.

In Saudi Arabia Zain was seeking to raise SAR 6.3 billion through an IPO in February 2008, which was
oversubscribed by 183% with more than 8.50 million investors purchasing shares worth SAR 17.83
billion. It raised another SAR 700 million by selling shares to the state-run Public Pension Agency. On
January 6, 2008, Zain’s two Iraqi operations - MTC Atheer and Iraqna - commenced combined
operations as Zain. This re-branding follows the acquisition of Iraqna Company for Mobile Phone
Services Ltd. (Iraqna) by Zain in December 2007, for USD 1.2 billion. The subsidiary intends to
achieve 10 million subscribers in Iraq from the current 7.5 million by the end of this year. In December
2007, Zain revealed plans to bid for Lebanon’s USD 6.8 billion mobile phone license through an
auction that is scheduled to take place on May 1, 2008. In June 2007, Zain acquired 100% of Celtel’s
outstanding shares, following the final payment of USD 467 million. This payment finalizes a binding
agreement signed with Celtel in April 2005, to acquire the remaining 15% of its outstanding shares
within two years. During the same month, the company received USD 320 million from the
International Finance Corporation to improve and expand the services of its African subsidiaries.

On February 13, 2008, Zain Bahrain signed an agreement with XIUS, a global mobile phone solutions
provider, for the deployment of its InstaRoam product that provides instant roaming access to more
than 500 networks in 250 countries. Earlier in December 2007, Zain’s Jordanian venture inked a deal
with Tejari, the region’s leading online Business to Business (B2B) marketplace, enabling the former to
benefit from the latter’s services to help reduce procurement costs and streamline buying processes.
In November 2007, Zain’s subsidiary Celtel International announced the extension of ‘One Network’ –
the world’s first borderless mobile network in Africa to Burkina Faso, Chad, Malawi, Niger, Nigeria, and
Sudan. On January 07, 2007, Zain in Saudi Arabia and Nokia Siemens Networks inked a USD 935
million turnkey 2G and 3G network contract.

In an effort to increase its customer base, Zain has adopted a customer friendly image. On January
Customer-centric 15, 2008, it launched its new wireless Internet Router and Access Point, a true plug and play mobility
initiatives. device that can be used on desktops, laptops and any device equipped with WiFi to connect to various
High-Speed Data packages which the company offers. In September 2007, it deployed the world’s first
nationwide WiMAX network in Bahrain, ‘Zain@home’, which offers high speed broadband internet
connectivity of up to 2 mbps, and fixed line voice and mobile services without requiring a land-line.

Positives

• Zain enjoys strong brand recognition in Kuwait, the Arabian Gulf region, and North Africa as a
leading provider of mobile services.

• After the acquisition of Celtel, the company has become a dominant player in Africa, the most
under-penetrated but among the fastest growing telecom markets in the world.

• Zain is spreading itself across the globe, which would not only increase its client base but
also provide it with cost leverage.

Negatives

• The imminent entry of STC in Kuwait is likely to intensify competition, pressurizing ARPUs.

• The company is exposed to risks arising out of its entry into varied geographical areas.
 Valuation: Discounted Cash Flows

We have used the Discounted Cash Flow (DCF) method to determine our fair value estimate. As
inputs for our valuation, we have used the unlevered industry Beta for emerging markets’ Telecom
Services providers of 1.28. We have derived the equity premium by adding the historical premium of
US equities over the risk-free rate and the country premium. We estimate a country premium of
Cost of Equity: 12.31% 0.75% using Moody’s long-term country rating (Aa2 for Kuwait) and estimating a default spread for
WACC: 11.35% that rating, based upon the difference in yields for traded country bonds.

As a proxy for the risk-free rate of interest, we have taken the yield on 10-year US treasury notes as
the proxy for the risk-free rate of interest. At the time of this report, the 10-year US Treasury bond
had a yield of 3.800%.

Based on the inputs and the Capital Asset Pricing Model, we arrive at a Cost of Equity of 12.31%.
Considering the long-term debts of Zain, we arrive at the Weighted Average Cost of Capital (WACC)
of 11.35%.

Investment Opinion

The telecommunications sector in the GCC in particular, and the wider MENA region in general, is
witnessing unprecedented growth rates as a result of liberalization. Zain has adequately prepared
itself to confront the forthcoming challenge by undertaking aggressive expansion strategies and by
investing in infrastructure to support services throughout the country. The company’s operation in
sub-Saharan Africa provides it with immense opportunity to expand its subscriber base and
Fair Value: KWD 4.644 revenue, as the penetration level in this region is relatively low. Further, the group’s Ghana entry
through Celtel is a step in the right direction as Ghana has seen rapid expansion in subscriber base
Investment Opinion: in the last twelve months, growing at approximately 56%. Yet, it has a low mobile penetration of a
OVERWEIGHT mere 28%, translating into significant growth prospects for Zain. The company’s acquisition of
Iraqna will consolidate MTC Atheer’s market-leading position in Iraq, creating a combined customer
base of more than seven million. Additionally, if Zain’s Lebanese license plan materializes, the
company will further enhance its revenue stream significantly. ARPUs in Lebanon is among the
highest in the world at around USD 900 per year, while mobile penetration stands at 30% - far lower
than its neighboring countries. Finally, the company’s proposal to increase capital through bonus as
well as right issues would enable it to reduce borrowing costs in the short-term and allow it to
enhance its leverage.

On the other hand, the liberalization of Kuwait’s telecom market is fraught with challenges. The
arrival of STC will force market players to offer new and innovative services at low prices. Further,
Kuwait’s mobile market is moving towards maturity with the country’s mobile penetration rate
standing over 100%. However, we believe that Zain is in a position to alleviate these challenges
thanks to its aggressive expansion strategies.

During 2007, Zain’s stock gained 72.9% versus the KSE’s rise of 24.7%. From the beginning of
2008, the stock has risen 8.4%. On February 21, 2008, the company proposed to increase its
capital through a 50% bonus issue and 75% rights issue, which in turn would trim its EPS level.
Keeping in mind its aggressive expansion strategy and strong fundamentals, we revise our earlier
Fair Value per share for Zain upwards by 13.3% to KWD 4.644 from KWD 4.100 (as on April 25,
2007). The stock exhibits a 12.2% potential upside from its closing price of KWD 4.140 (as on
February 27, 2008). Therefore, we reiterate our earlier OVERWEIGHT investment opinion on
Zain’s stock.

Condensed Projections

(in KWD ’000) 2008E 2009E 2010E

Total assets 5,153,062 6,029,083 7,054,027
Revenue 2,177,845 2,880,292 3,770,380
Net profit 396,347 446,426 510,305
EPS (fils) 95 107 122
FINANCIAL STATEMENTS

BALANCE SHEET
As on

In KWD '000 31 Dec ’07 31 Dec ’06 %Chg

Assets
Current assets
Cash and bank balance 261,263 474,322 -44.9%
Trade and other receivables 246,276 184,485 33.5%
Inventories 22,047 14,791 49.1%
Investment securities at fair value through profit or loss 23,002 18,455 24.6%
Total current asset 552,588 692,053 -20.2%
Non-current assets
Deferred tax asset 64,724 40,618 59.3%
Investment securities available for sale 179,468 134,842 33.1%
Investment in associates 259,640 8,026 3135.0%
Loan to an associate 170,875 0
Property and equipment 1,495,602 1,131,189 32.2%
Intangible assets 1,637,255 1,477,557 10.8%
Other financial assets 6,850 6,648 3.0%
Total non-current assets 3,814,414 2,798,880 36.3%
Total assets 4,367,002 3,490,933 25.1%
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables 554,754 427,396 29.8%
Due to banks 453,747 460,721 -1.5%
Due to minority interest holders 18,509 155,262 -88.1%
1,027,010 1,043,379 -1.6%
Non-current liabilities
Due to banks 1,531,512 921,117 66.3%
Deferred tax liabilities 31,763 9,980 218.3%
Other non-current liabilities 28,411 16,023 77.3%
1,591,686 947,120 68.1%
Equity
Attributable to Parent Company's shareholders
Share capital 189,398 126,182 50.1%
Treasury shares -15,576 -15,576 0.0%
Share premium 624,465 624,465 0.0%
Legal reserve 94,699 63,091 50.1%
Voluntary reserve 63,091 63,091 0.0%
Foreign currency translation reserve -26,014 -24,390 6.7%
Investment fair valuation reserve 67,704 41,778 62.1%
Share based compensation reserve 12,222 5,736 113.1%
Retained earnings 571,938 470,055 21.7%
1,581,927 1,354,432 16.8%
Minority interest 166,379 146,002 14.0%
Total equity 1,748,306 1,500,434 16.5%
Total Liabilities and Equity 4,367,002 3,490,933 25.1%
INCOME STATEMENT
For the period ended

In KWD '000 31 Dec ’07 31 Dec ’06 %Chg

Revenue 1,677,270 1,297,415 29.3%
Cost of sales -361,751 -274,729 31.7%
Gross profit 1,315,519 1,022,686 28.6%
Distribution, marketing & operating expenses -470,446 -336,708 39.7%
General and administrative expenses -153,537 -115,829 32.6%
Depreciation and amortization -236,062 -162,057 45.7%
Goodwill written off on disposal of shares in subsidiaries 0 -5,785 -100.0%
Provision for impairment - trade and other receivables -3,832 -2,921 31.2%
Operating profit 451,642 399,386 13.1%
Interest income 26,289 18,254 44.0%
Investment income 21,537 7,810 175.8%
Share of profit/loss of associate (net) -3,135 5,825 -153.8%
Other income 6,092 9,505 -35.9%
Finance cost -123,586 -88,084 40.3%
Gain on currency revaluation 13,144 3,396 287.0%
Board of Directors’ remuneration -28 -28 0.0%
Contribution to Kuwait Foundation for Advancement of Sciences -2,973 -2,940 1.1%
National Labour Support Tax -5,447 -4,323 26.0%
Profit for the period before income tax 383,535 348,801 10.0%
Income tax expense of subsidiaries -40,874 -34,972 16.9%
Profit for the period 342,661 313,829 9.2%
Attributable to:
Shareholders of the Parent Company 320,455 294,981 8.6%
Minority interest 22,206 18,848 17.8%
342,661 313,829 9.2%

No. of Outstanding Shares (‘000) 1,858,710 1,869,217

EPS (Fils) 172 158 8.9%

KEY RATIOS

31 Dec ’07 31 Dec ’06

Net profit margin 19.1% 22.7%

EBITDA margin 41.2% 43.9%
Shareholders’ Equity to Total Assets Ratio 36.2% 38.8%
Total Debt/Equity ratio 125.5% 102.0%
Asset turnover ratio (times) 0.43 0.47
EPS (Fils) 172 158
ROE 20.3% 21.8%
ROA 7.3% 8.4%
 OPINION RATINGS:

The stock is expected to perform better than

the market index; investors may give the stock
OVERWEIGHT
more weight in their portfolio, than its weight in
the overall market

The stock is expected to perform in tandem

with the market index; investors may give the
NEUTRAL
stock the same weight in their portfolio as in the
overall market.

The Stock is not expected to perform in line

with the market index; investors may give the
UNDERWEIGHT
stock less weight in their portfolio than its
weight in the overall market.

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but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is
provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing
contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may
fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the
investment to increase or diminish. Consequently, investors may not get back the full value of their original investment