Mobile Telecommunications Company Saudi Arabia (Zain) reported an improvement in earnings for the first quarter (Q1) of 2019, but still failed to meet analysts’ expectations, triggering a retreat in the company’s shares on Wednesday.

Zain recorded a net profit after zakat and tax of 129 million Saudi riyals ($34.4 million) for Q1 2019, compared to a 77 million riyals loss in Q1 2018.

“Net income of SAR129mn chiefly came on the lower royalty fees and released provisions, still below our estimate of SAR165mn, due to an expected higher reversal of provision of SAR142mn,” Hassan Abdelgelil, telecom equity analyst at Egypt-based CI Capital, told Zawya by email.

“Excluding those two items (royalty fees and released provisions), net income would have been a loss of SAR81mn,” Abdelgelil added.

Telecommunications companies in the Kingdom signed a deal with the government in December 2018, under which annual royalty for commercial services has dropped to 10 percent of net revenues, from 15 percent previously.

Q1 2019 revenue amounted to 2.09 billion riyals, compared to 1.69 billion riyals in Q1 2018, translating into a 23.67 percent increase, in line with CI Capital’s estimate.

“The company attributed the revenue growth to the increased demand for (its) products and services. We believe, however, this is mainly due to low margin handset sales revenue growth witnessed as of 2Q18,” Abdelgelil added.

“This is further confirmed by the 559bps (basis points) y-o-y (year on year) drop in gross margin to 60.7%,” after excluding the impact of the 5 percent lower royalty fees of revenue (102 million riyals), and the 107 million riyals provision released, Abdelgelil said.

The company’s shares were trading 2.36 percent lower, at 10.74 riyals, by 12:50 GST on Wednesday, while Zain’s shares have gained 29.87 percent so far since the start of 2019. CI Capital is “underweight” on the stock, with a target price of 6.83 riyals.

(Reporting by Gerard Aoun; Editing by Michael Fahy)

(gerard.aoun@refinitiv.com)

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