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Morning Call about Ufone and Broadband segment continue to fuel growth – Arif Habib Limited

Karachi: With no short term trigger, the stock of Pakistan Telecommunication Company Limited (PTC) has lost more than 25.3% since the start of FY12, underperforming the Benchmark KSE-100 Index by 13.8%.

According to Arif Habib Limited, this was mainly on account of shrinking fixed line operations, price competition and rising operating cost which resulted in a 20% YoY decline in the company’s bottom line during FY11.

On standalone basis the company registered a decline of 20% in its net earnings in FY11. The company posted an earnings of PRK 7,428mn (EPS: PKR 1.46) as compared to PKR 9,267mn (EPS: PKR 1.82) in FY10. This drop in earnings is mainly due to declining revenues from fixed line operations by 4.4% and increase in salaries pushing the cost of service up by 9% YoY and 4% YoY rise in admin and selling expenses during FY11.

A 53% YoY higher other income has supported the bottom line However other income supported the bottom line as it reached to PKR 7,839mn in FY11, an increase of 53% YoY. This is primarily due to the dividend received from its subsidiary (Ufone) and interest earned on the loan provided to Ufone. PTC had issued a loan of PKR 11bn to Ufone for capital expenditure at a markup of 3M KIBOR plus 82 to 180 basis points.

 

Financial Highlights (PKRmn) 4QFY11 3QFY11  % Chg. FY11A FY10A % Chg.
Revenue  14,230 13,326 7%  55,254 57,148 -3%
Cost of Services 11,254 10,486  7% 41,815 38,361 9%
Gross Profit 2,976 2,840 5% 13,439 18,786 -28%
Admin & General Expenses  2,240 1,837 22%  7,376 7,121 4%
Selling & Marketing Expenses 577 500 15% 2,281 2,142 6%
Other Income 3,650 1,002 264% 7,840 5,135 53%
Operating Profit 3,809 1,505 153% 11,621 14,657 -21%
Finance Cost  35 46 -25% 208 403 -49%
Profit Before Tax 3,774  1,458 159% 11,414 14,254 -20%
Taxation 1,318  509 159% 3,986 4,987 -20%
Profit After Tax 2,456 949 159% 7,428 9,267 -20%
EPS (PKR)  0.48 0.19 159% 1.46 1.82 -20%

 

Source: Company Financials & AHL Research

Ufone and Broadband segment will continue to fuel growth

Going forward, shrinkage in fixed line & wireless local loop (WLL) operations and high operating expenditures pose major downside to PTC’s margins. Respite, however is expected to come from Ufone and broadband revenues, which are expected to grow by 9% and 8%, respectively. Going forward, Arif Habib Limited expects Ufone to hold its market share of 19% and will continue to contribute significantly (49% from 47% in FY11) in PTC’s topline. Further the company will continue to improve its broadband services by introducing new high speed broadband packages to attract new subscribers. Moreover resolution of property issue with GoP and establishment of international clearing house for curbing grey traffic will act as key triggers.

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