Pakistan Telecommunication Company Limited

 Pakistan Telecommunication Company Limited
Subsidiary limiting the profitability PTC ‐ BUY Target Price: PKR 24 Current Price: PKR 21 PTC Performance 1M 3M 12M Absolute % ‐8%
‐7%
‐21%
Relative to KSE % ‐9%
‐9%
‐37%
Bloomberg PTC.PA
Reuters PTCA.KA
MCAP (USD mn) 1,023
12M ADT (USD mn) 0.9
Shares Outstanding (mn) 5,100
PTC vs. KSE100 Relative Chart PTC
40%
KSE100 Index
30%
20%
10%
0%
‐10%
‐20%
May‐15
Apr‐15
May‐15
Jan‐15
Mar‐15
Jan‐15
Dec‐14
Oct‐14
Nov‐14
Sep‐14
Jul‐14
Aug‐14
Jun‐14
‐30%
Source: BMA Research
Jehanzaib Zafar Tuesday June 09, 2015
Pakistan Telecommunication Company (PTC) has underperformed the KSE‐100 index by 9% since Apr’15 on account of a dismal start to CY15 where the profitability during 1QCY15 posted a decline of 84%YoY to PKR716mn (EPS: PKR0.14). The decline in earnings came on the back of depressed profitability of the subsidiary company, PTML, which posted a loss of PKR1.79bn (EPS: PKR0.35). In this regard, the top‐line of the subsidiary declined by 11%YoY as the consumer base of the company shrunk by over 12%YoY while the ARPUs only increased by 2%YoY. The gross margins of the subsidiary also remained under pressure due to higher depreciation and amortization expense. Finance cost, which jumped by 4.7xYoY on account of higher LT debt, also squeezed the profitability. Moving ahead, potential growth in LDI minutes owing to termination of ICH and crackdown on illegal SIMs is likely to support the earnings. As per our channel checks, the minutes landing on the network have averaged around 600‐650mn minutes/month as against ~335mn minutes/month during ICH era. We expect the minutes to pick up as GoP continues with its crack‐down on unregistered SIMs. At our current TP of PKR24/sh, the stock offers a total return of 25% on last closing. Difficult start to the year: PTC’s consolidated earnings clocked at PKR716mn (EPS: PKR0.14), posting a decline of 84%YoY. The decline in earnings came on the back of poor profitability of the subsidiary company, PTML, which posted a loss of PKR1.79bn (EPS: PKR0.35). In this regard, the top‐line of the subsidiary declined by 11%YoY as the consumer base of the company shrunk by over 12%YoY while the ARPUs only increased by 2%YoY. The gross margins of the subsidiary also remained under pressure due to higher depreciation and amortization expense. Finance cost, which jumped by 4.7xYoY on account of higher LT debt, also squeezed the profitability. Post ICH minutes: As per our channel checks, the minutes landing on the ICH network have averaged around 600‐650million/month while during the month of Apr’15 the figure crossed 900mn minutes/month mark. For our valuation purpose, we have assumed that on average 800mn minutes will land on the network. Every 100mn minutes addition to our base case will lead to a positive annualized earnings impact of PKR0.05/sh on PTC’s bottom line, on an standalone basis. ARPUs and Customer Base of PTML: In the wake of government’s crackdown on unregistered SIMs, the customer base of PTC’s subsidiary (PTML) has contracted from 21.9mn users (as of Jan’15) to only 18.3mn users by the end of Apr’15, a staggering decline of 16%CYTD. PTML’s ARPU which declined to PKR179 in CY14 from PKR191 a year before, have continued its downtrend in the current year (~ARPUs during 1QCY15: PKR173) due to intense competition and government crackdown. However, we expect ARPUs to stabilize around PKR179 for CY15 as we expect the revenue per user to pick on the back of increasing penetration of 3G services in the market. Investment Perspective: We believe that the unconsolidated earnings of PTC are likely to improve in CY15 due to the absence of one‐time write‐offs realized in CY14 (VSS and loss due to fire incident). However, depressed profitability of PTML on the back of i) shrinking customer base and ARPUs, ii) mounting finance cost and iii) higher depreciation and amortization expense will contain the upside in consolidated earnings. At our TP of PKR24/sh, the stock offers total return of 25% on last closing. jehanzaib.zafar@bmacapital.com +92 111 262 111 Ext: 2062 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.
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