Development

Zain Sudan faces revenue hit amid worsening civil unrest

May 7, 2023, 7:09 AM

Impact of mass exodus on mobile operator will become clear
Limits on tarrifs rises as currency deteriorates and economy worsens
98% of customers are on pay-as-you-go mobile contracts

Zain Sudan, the country’s leading mobile operator, has suffered a hit to its revenue as a result of the spiralling conflict in Africa’s third-largest country, a spokesman told AGBI on Thursday.

Internecine fighting between two factions of Sudan’s military began in mid-April. More than 500 people have been killed and nearly 440,000 people displaced, the BBC reported.

“The mass exodus and downturn in normal economic activity will have some impact on revenues, although this amount is not clear as we recently closed Q1,” a Zain spokesman said.

He added Zain Sudan’s results for the three months to March 31 were “very impressive” and will be published as part of the group’s quarterly earnings.

Zain Sudan’s 2022 annual net profit of 72.25 million dinars ($236 million) was more than double that of 2021 following regulatory approval to raise its consumer mobile tariffs by 124 percent. This more than offset a 30 percent decline in the value of the Sudanese pound last year.

“As the currency deteriorates further and the economic situation worsens, it may get trickier for Zain to raise its tariffs – there’s a limit to consumers’ affordability than was the case previously,” said Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

“It’s a clear business risk – Zain Sudan’s profits this year could be impacted.”

In terms of net profit, Zain’s Sudan operations were second only to Zain’s domestic unit, which made a net profit of $270 million.

Dividends

Zain Sudan paid a dividend of $21 million to the parent company in 2022, its second pay-out in over a decade, which Zain’s annual report describes as a “significant milestone”.

The subsidiary will pay dividends to its parent again in 2023, the spokesman said, predicting these will likely be higher than the 2022 pay-out.

Zain has struggled to repatriate its profits from Sudan due to a shortage of dollars and an inability to convert Sudanese pounds into hard currency. These difficulties led the Kuwaiti company to invest in Sudan real estate as a hedge against inflation and local currency devaluation.

Investment plans

Zain’s plan to invest $800 million in its Sudanese telecom infrastructure over the coming five years “remains unchanged”, the spokesman said.

Zain’s commitment to Sudan contrasts with a sustained decline in foreign direct investment into the country. FDI fell to $462 million in 2021 from $717 million in 2020 and was the lowest since at least 2005, according to UNCTAD.

“We believe the conflict is temporary and things will be resolved soon. We firmly believe in the future potential of Sudan,” the spokesman said.

Equipment suppliers require payment in hard currency, so Zain Group would likely fund much of this investment rather than relying on Zain Sudan’s profits.

Zain Group’s major shareholders include the state-owned Kuwait Investment Authority (24 percent), Oman Telecommunications (22 percent), Kuwait’s Al-Sharq Holding Co (5 percent) and the country’s public pension fund (5 percent).

Of the Sudan subsidiary’s customers, 98 percent are on pay-as-you-go mobile contracts, which reduces its financial vulnerabilities.

Sico’s Lakhotia said that the risks to the business were in the longer term. Zain is planning to invest in a submarine cable landing station, build out 4G in Khartoum and expand its network nationwide.

“Logically, until things settle down and political stability returns, there will be a pause to additional investments in Sudan other than maintenance-related spending.”

Not for sale

Zain recently decided against selling Zain Sudan, rejecting a $1.3 billion offer from Sudan’s Dal Group, Zain’s chief financial officer Ossama Matta told a March 14 analysts’ call.

Zain’s annual report also shows foreign currency losses of 1.51 billion dinars ($4.9 billion)– more than seven times’ last year’s annual net profit – which it says mainly arose from its operations in Sudan and South Sudan.

At present this is counted under its equity, but if Zain Group were to sell some or all of its Sudan or South Sudan subsidiaries, foreign currency losses may have to be reclassified as losses on its income statement.

In 2022, Zain won a court case against Kuwait’s communications ministry and the country’s telecoms regulator. The company was awarded $80.6 million, although an appeal will be in July.

“Zain’s one-off gains from the likes of the court case or further tower sales will likely more than offset any drag from Sudan in the near term,” said Lakhotia.

“But from a longer-term perspective the current uncertainty from the conflict on its future operations and growth strategy in a key market like Sudan is clearly a concern.

“Zain stock offers a decent dividend yield, so the stock hasn’t reacted to the Sudan crisis.”

Zain’s shares are near-flat in 2023.