Zain KSA share performance has been hindered by the proposed sale of Zain Kuwait's 25 percent stake and seemingly restrictive debt burden. Both of these hurdles may soon be put to rest, paving way for investors to shift focus on fundamentals. According to Riyad Capital, Zain KSA shares are deeply undervalued on a P/S multiple and do not reflect the on-going growth cycle. “We raise our recommendation to Buy from Hold and reduce the target price to SR6.40, representing 1.1x 2012 sales,” Riyad Capital said in its report.
 
Debt reduction

The restructuring is projected to reduce paid-up capital of SR14.0 billion by accumulated losses of SR9.2 billion, resulting in an effective reverse share split which will boost the price above SR10 per share. The second step will be to conclude a rights issue to recapitalize the balance sheet and possibly pay down short-term debt of some SR9.7 billion due in January 2012. Zain KSA has the option to extend this facility to July, contingent on founding shareholders subscription of rights issue. Essentially the SR3.9 billion advanced by founding shareholders will be converted to equity.
 
Restructuring

In the event that the restructuring fails, a possible outcome may be that Zain KSA emerges as a privately held company. In which case, either a management buyout and/or institutional ownership are probable scenarios. A buyback program can be profitable to investors taking positions at current levels. Shutting down operations and exiting the business seems unlikely.
 
Undervalued

The prevailing 1.1x 2011 P/S multiple does not reflect the expected +18 percent Y/Y and +16 percent Y/Y topline growth for 2011 and 2012, respectively, due to the restructuring overhang, the report said.

“We valued Zain KSA by applying the current P/S multiple of 1.1x to our 2012 sales per share estimate,” Riyad Capital said.