Morning Call about Pakistan Telecommunication Company Limited – Arif Habib Limited

Karachi: Tough Times Ahead

Arif Habib Limited has downgraded Arif Habib Limited’s target price of Pakistan Telecommunication Company Limited (PTC) by 18.0% due to the shrinking fixed line operations.

According to Arif Habib Limited, based on Discounted Cash flow Model (DCF), Arif Habib Limited’s Dec-12 target price for the scrip works out to PKR 16.7/share offering an upside of 39.9% from closing price of PKR11.94. On Consolidated basis Arif Habib Limited expects the company to post an earnings of PKR 9,479 million (EPS: PKR 1.86/share) in FY12E and PKR 9,755 million (EPS: PKR 1.91/share) in FY13F. The company is expected to pay cash dividend of PKR 1.0/share each in FY12 and FY13 translating into a dividend yield of 8.4%.

Fixed Line Operations are expected to squeeze further
PTC enjoys the lion’s share of 95.6% in fixed local loop (FLL) segment of Pakistan and earns 74% revenue through it. However, FLL subscribers’ base started shrinking from FY06 (5.24 million) and since then the segment has contracted by 42% to 3.02 million by FY11. Consequently, segment’s teledensity has dropped to 1.8% compared to 3.4% in FY06. Due to 42% decline in subscriber base in last 5 years company’s revenue have declined by 9.6% from PKR 86.3 billion in FY06 to PKR 78.0 billion in FY11. This decline is due to the technological shift as subscribers are tilting towards mobile technology. Going forward Arif Habib Limited has assumed that the subscriber base of fixed line operations will decline by 2.75% causing further shrinkage in revenues of the company.

PTC has dissolved the International Clearing House agreement
The agreement between the Long Distance International (LDI) Operators and PTC, to control grey traffic by establishing an International Clearing House (ICH) has been dissolved before its implementation. PTC shelved the agreement as Transworld Associates Private Limited had filed a case against the implementation of the agreement.

Ufone and Broadband segment will continue to fuel growth
Going forward, shrinkage in fixed line 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 6% and 5%, respectively. Arif Habib Limited expects Ufone to maintain its market share of 20% and will continue to contribute significantly towards PTC’s Topline. Furthermore, DSL subscribers have crossed the 0.6 million mark while wireless local loop (WLL) subscribers have reached to 1.35 million. Moreover, the company continued to enhance its market share by introducing new connectivity solutions like (EvO Wi-Fi Cloud and Global IP Connect) and new high speed broadband packages.

3G License Auction might get delayed
Pakistan Telecommunication Authority (PTA) plans to auction 3 licenses of 3G/4G/LTE technologies by the end of March 2012. The base price for each license has been set to USD 210m. Government plans to generate approximately USD 800 million through this auction. However this auction might get delayed by 2-3 months as Standing Committee of Senate on Telecom and Information Technology has asked PTA to make amendments in 3G policy.

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