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AKD Quotidian about —: PTC: Time to unbundle the value!

Karachi: AKD Securities has revised its target price for PTC to PKRI9.5/share from PKR24/share previously, where AKD has arrived at its target price based on DDM methodology.

According to AKD Securities, they find PTC very attractive at current levels given near term triggers including i) termination of technical service agreement (ISA) with Etisalat in Oct’11 which would have an incremental EPS impact of PKRO.38 in FYI2F and PKRO.58 in FYI3F, ii) expanding footprint of broadband segment which is going to boost the flagging revenues of PTC’s fixed line business and iii) attractive FYI2F dividend yield of 15% coupled with relative attraction when compared with regional peers.

FY11 performance review: Consolidated earnings of PTC in FY11 declined by 28%YoY to PKR8.4bn (EPS: PKR1 .65) largely due to lower profitability of the fixed line business. However, the company’s cellular subsidiary PTML (Ufone) was the bright spot where AKD Securities estimates FY11 revenues and EBITDA to have grown by 18%YoY and 25%YoY, respectively, to PKR49bn and PKR2O.4bn. Standalone FY11 earnings were down by 20%YoY to PKR7.4bn (EPS PKR1 .46), where revenue de growth (-3%YoY) and higher operating costs were the major earnings dampeners. As for revenue, as 25%YoY fall in international revenues to PKR5.3bn was the major reason for the top-line decline. Encouragingly, domestic revenues were relatively flat in FY11, where YoY fall was at just 0.3% compared with substantial declines of 5.6%YoY and 12.6%YoY in FY10 and FY09, respectively. Increasing contribution from the broadband and other non-voice segments is making up for the flagging voice revenues, which has been hit by cut throat competition from the cellular segment. As per PlC’s consolidated accounts, contribution of `Voice’ to the revenue has been sequentially declining, where in FY11 its share in revenue stood at 75%, down from 85% last year, while the non-voice segment has recorded a substantial revenue growth of 85%YoY, taking its share in the revenue pie to 25% in FY11, up from 15% last year.

FY12 could be the turnaround year for PTC: AKD Securities sees FY12 as the year of revival for PTC with are a number of triggers including I) termination of technical service agreement (TSA) in Oct11 with Etisalat and ii) increasing penetration of broadband to spur fixed line revenues. As per the ISA, PTC had to pay 3.5% of group revenues to Etisalat as technical fee, where termination of the agreement would lead to an incremental EPS impact of PKRO.38 and PKRO.58 in FY12F and FY13F respectively. Only caveat could be the potential renewal of ISA, whereby the decision would be contingent on talks between PTC and Etisalat. Based on AKD’s estimates, a 1% change in technical service fee would result in an average EPS change of 5% for PlC. Additionally, broadband would be the real growth story for PIG, where AKD Securities sees increasing product density (avg. number of products used by consumers) in the form of triple play and eVo tab as the key revenue drivers for the fixed line business.

Outlook: PlC is trading at a steep discount to AKD’s revised 0DM-based target price of PKR19.5/share. Consolidated earnings are forecast to grow at 5-yr CAGR of 28% over FY11-FY15F, with earnings growth spurred by robust growth from both PTML and broadband. The scrip is trading at FY12F PER and dividend yield of 4.8x and 15%, respectively. Even on a regional basis, AKD Securities finds PTCL very cheap where the company is trading at a steep discount to its peers on all valuation metrics presented in the table below.

PTCL: Regional Peer group analysis*


China Telecom 1.61 4.57  19.63  33%
Saudi Telecom 4.59 4.92 7.25   38%
MarocTelecom 15.59 724 1397 58%
Reliance Communication  0.74  5.92 11.14  37%
Telekom Malaysia 235 5.16 13.15  38%
Oman Telecommunication 2.27  4.33  810  46%
Kazaktelecom  0.77 330 4.57 39%
Bahrain Telecom  1.66 362 7.20 41%
Jordan Telecom 3.89 6.18 14.17 43%
Bakrie Telecom  172 1137   na  45%
Sri Lanka Telecom 180  na 17.91 33%
(Emerging Market 7.19 7.64  1631 37%
PTCL 052  1.46 5.54  42%
Discount to avg. -93% -81%  -66%
*Calculations based on 12M trailing data
Source: Bloomberg & AKI) Research

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