AKD Quotidian about — PTC VSS implementation: Negatives Overplayed!

Karachi, July 30, 2012 (PPI-OT): As per news reports, PTC is planning a second round of Voluntary Separation Scheme (VSS) whereby the company will be offering VSS to upto 16.5k of its employees or around 55% of its workforce, with an estimated cost of PKR 8 billion – PKR 10 billion (annualized EPS impact of PKR 1.0- PKR 1.3).

According to AKD Securities, this would be the second VSS offering following PTC’s VSS offering in FY08, which cost the company PKR 23.9 billion and resulted in cost savings of PKR 2.4 billion and PKR 2.0 billion in FY08 and FY09 respectively. Subsequent rise in government employee salaries dampened the impact of VSS. However, AKD Securities estimates the annual cost savings from the second VSS in excess of PKR 5.0 billion going forward. AKD Securities believes that the market has overreacted to the VSS news and highlights the recent correction in share price as an attractive entry point, where the scrip offers 26% upside to AKD Securities’ target price of PKR 18/share. Buy!

The Event: As per news reports, PTC is planning a second round of Voluntary Separation Scheme (VSS) whereby the company will be offering VSS to upto 16.5k of its employees or around 55% of its workforce. The estimated cost of the scheme ranges between PKR 8 billion – PKR 10 billion where PTC is attempting to scale down its labour costs to align them with international benchmarks. One of the PTC officials has quoted that the company intends to bring down labour costs to around 10% of its revenues compared with the current proportion of 22%.

What happened in VSS-I: PTC offered its first VSS in FY08 where 29.9k employees opted for the scheme, which cost a total of PKR 41.4 billion of which the GoP contributed PKR 17.4 billion (42% of the amount), while the remaining PKR 23.9 billion was funded by PTC, which was also expensed during the year. The impact of VSS was visible in the first two years (FY08 and FY09) with total salary expense of PTC standalone operations down by PKR 2.4 billion in FY08 and PKR 2.0 billion in FY09 respectively. However, in the following years’ salary expense rose in the +20%YoY range, courtesy of a more than generous increase in salaries of government employees (Please refer to table on right for chronology of salary rise of govt. employees).

Analyzing VSS-II: VSS-II comes at a time when PTC (standalone/wireline) operations are facing single digit revenue growth while salary expenses are rising well above 20%. Thus, any reduction in workforce will be value accretive; despite having a significant one year negative earnings impact (EPS impact of PKR 10 billion VSS is PKR 1.27). AKD Securities estimates annual savings in the vicinity of PKR 5.0 billion to PKR 6.2 billion over the next three years assuming 16.5k employees opt for the VSS, where AKD Securities has assumed an average salary of PKR 25k/annum, growing at an annual rate of 12%. FTC currently is chronically overstaffed given the high salary cost relative to revenue. Case in point is its 100% owned subsidiary PTML (Ufone), whose salary costs are just -5% of its revenues, indicating huge room for cost rationalization for the overall company. Furthermore, the staff/labour costs of parent ETISALAT is also at a considerably lower level of 13% of revenues.

PTC: Salary expense analysis
(PKR million) FY08AFY09A FY10A FY11A
Stand alone    
Salary expense

   11,554

 9,609

10,610

  13,231

YoY

 -17%

  -18%

10%

 25%

Operating costs

    49,970

 48,485

  47,520

51,472

Salary expense as % of Opp. Cost

23%

20%

 22%

 26%

Revenue

 55,355

59,255

 57,175

 55,254

Salary expense as % of Revenue

  18%

  18%

  19%

 24%

Consolidated

Salary expense

12,937

11,215

  12,567

 15,888

 

-14%

  -13%

  12%

 24%

Operating costs

   71,282

 76,639

  85,225

  90,491

Salary expense as % at Opp. Cost

    18%

 15%

  15%

   17%

Revenue

 91,663

92,720

  98,906

104,590

Salary expense as % of Revenue

    14%

 12%

   13%

  15%

PTML (Ufone)

Salary expense

 1,283

 1,606

 1,957

2,357

YoY

32%

 25%

22%

 20%

Operating costs

21,312

28,155

  34,630

39,019

Salary expense as % of Opp. Cost

   6%

     6%

  6%

  6%

Revenue

 25,327

 33,481

  41,731

49,336

Salary expense as % of Revenue

5%

    5%

  5%

6%

Based on difference between consolidated and stand alone figures
Source: Company Reports, AKD Research

The Etisatat connection: The GoP is still the majority shareholder in PTC with total holding of 62%, but ETISALAT enjoys management control with a shareholding of 26%. As per the Shareholders Agreement between ETISALAT and GoP, ETISALAT has a majority on the Board of Directors (BoD) with 5 seats out of the 9, making it very easy for the company to push for VSS-II in case there is opposition from other ends especially the labour union. However, as was witnessed recently in the case of KESC, the company will probably have to face some stiff opposition from the PTC labour union. Bargaining power of ETISALAT is further enhanced by the fact that recently a lot of foreign companies have exited or are in the process of exiting from Pakistan (BP, AKZO and Chevron), making it unlikely for GoP to oppose ETISALAT plans. News reports also indicate a possible settlement of the outstanding US$0800 million dues of ETISALAT to GoP in connection with privatization proceeds, where the two parties may settle at a payment of US$700 million after discounting US$100 million from the disputed properties.

Valuation: The share price reacted very negatively to the news of VSS, falling by 3.5% on Friday. Share price fell on concerns relating to the one time negative EPS impact as well as potential of PTC skipping its FY12 dividend. However, AKD Securities believes that the market is discounting the real potential of VSS savings, where further decline in share price should be taken as an opportunity to build up fresh positions in the scrip. AKD Securities has slightly reduced AKD Securities’ earnings estimates by -5% on lower revenue growth of Ufone, whereby AKD Securities’ Dec-End TP for the scrip arrives at PKR 18/share, still offering a substantial upside of 26% from current levels.