RIYADH – Zain Saudi Arabia's recent decision to undergo capital restructuring as approved by its shareholders "ensures fresh start" for the company, Al Rajhi Capital said Monday on its commentary about the telecom firm. The plan will definitely play a big part in bringing the company back on track, it noted. "The restructuring process will ensure a smooth transition for the company from its mixed performance over the past couple of years."Zain has made significant progress by getting the restructuring plan approved by its shareholders, and planned a rights issue today (Tuesday). It will involve converting SR2.5 billion of debt into equity and raising SR3.5 billion from the market for payment to its its immediate debt holders. Out of the rights issue proceeds, 20 percent will be utilized in improving and upgrading network; mainly on HSPA and LTE. This is a positive development since the company had been suffering from lack of capex, which was hampering growth. Capex fell to only 10 percent of sales in 2011 from a decent 16 percent during 2010. Compare to Zain, Mobily had an aggressive capex allocation of 25 percent, while STC allocated 13 percent of sales to capex in 2011. "We believe the restructuring activity will wipe out 31 percent of debt from Zain's books and will enable the company to save around 35 percent on financial costs, which will in turn result in a significant improvement in its bottom line." As a result, Al Rajhi has lowered the overall risk estimate for the company and raised target price to SR15.9, and upgrade Zain to Neutral. Restructuring will positively impact bottom line, too. However, a few concerns still persist, the report said.Although, the restructuring plan should reduce Zain's net debt by 31 percent to SR10.8 billion, debt level will still be 1.5 times Al Rajhi's estimate of 2012 sales of SR7.2 billion. Similarly, the net debt will still represent 40 percent of enterprise value of SR26.2 billion. "We believe Zain needs to reduce its net debt to a level roughly equal to this year's sales or to 25 percent of enterprise value, which implies cutting net debt to about SR7 billion." Further, Zain should put efforts to improve its brand image by clearly outlining its strategies. Continued management reshuffle has also affected the company's overall brand image. – SG/QJM
