Morning Call about Pakistan Telecommunication Company – Arif Habib Limited

Karachi, December 23, 2013 (PPI-OT): LDI minutes for Dec’13 and Warid Deal scenarios

LDI minutes projected at 477mn, 3% MoM decline
As per latest 19 days numbers, Long Distance International (LDI) minutes are extrapolated to clock in at 477mn, to register a marginal 3% MoM decline.

According to Arif Habib Limited, LDI minutes seem to be at a continuous downward spiral despite on-going efforts from the telecom-related law enforcement agencies to have a clamp on grey trafficking. PTA chairman’s latest interview has indicated there may be a review in the ICH policy before 31st Dec’13, in which international call rates (currently at USc 8.8/min (USs 5.85/min margins and USc 2.9/min Access Promotion Charges) may change. Arif Habib Limited awaits further clarification on the development if it materializes (any downward revision in rates should provide boost to LDI minutes and reduced grey trafficking).

LDI minutes in 2013 and PTA’s APC collection
To sum up the entire 2013, an estimated total of 6.57bn LDI minutes (average 547mn minutes/month) have been terminated, in which an estimated inflow of USD 578mn is calculated to have come through it (estimated gov’t collection through APC at USD 191mn).

Pre-ICH last year (from Jan’12 – Sep’12), the gov’t collected an APC of USc 1.25/min despite minutes averaging at an astonishing 1.7bn a month! This reveals on a 9M basis (Pre-ICH) the total APC collection of the gov’t was higher at USD 197.4mn, indicating negative impacts of massive decline in documented LDI minutes. Arif Habib Limited believes PTA’s priority would be towards further stemming grey traffic with slight changes in ICH rates, if any, which should eventually increase their APC collection altogether.

Source: AHL Research

PTCL submits a binding bid offer for Warid Telecom
As per PTCL’s latest notice to KSE, the company’s board has authorized to submit its binding offer to acquire 100% of Warid Telecom, although PTCL has not quoted its total bid offer, market rumours suggest an offer of USD 78/subscriber.

Warid Telecom currently holds 12.8mn subscribers, which makes the deal to USD 998.4mn (PKR 106.0bn). As per our channel checks, Warid Telecom also contains total debt of USD 300mn, adjustment of which takes the net deal amount to USD 698.4mn. This would have a positive one-time bottom-line impact of PKR 4.5/share on Bank Al-Falah’s (BAFL) books. The deal will materialize sometime next year (CY14).

For PTC, Arif Habib Limited awaits clarity on the transaction as to how, and if, Warid Telecom will be taken on PTC’s books (whether Etisalat will merge it with Ufone or keep it as separate subsidiary). To recall, PTC’s book on a consolidated basis stands debt free, as Ufone (PTC’s 100% owned subsidiary) had paid out its outstanding PKR 20.5bn long term debt. Arif Habib Limited believes, Etisalat’s on-going dispute of USD 800mn with the gov’t of Pakistan over 131 properties may stand in the way of this transaction (regulatory approvals) as well as bidding for the 3G auction expected in Feb’14.

Recommendation
Arif Habib Limited currently has a ‘Hold’ stance on PTC. Our price target for PTC stands at PKR 34.6/share for Jun’14 (offering 11% upside from current levels) while the scrip trades at PBv and PE of 1.27x and 8.96x on CY14 estimates. Also, Arif Habib Limited expects PTC to post a consolidated CY13 EPS of PKR 3.01/share (9MCY13 EPS currently stands at PKR 2.21/share), with DPS of PKR 1.0/share taking total dividend payout for CY13 at PKR2.0/share.

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