Uncertain times test investor appetite for Wateen

Wateen Telecom (WTCL) – a project of the Abu Dhabi Group, incorporated in 2005 – offers a range of services including broadband, long distance international (LDI), systems integrations, and multimedia services. Wateen’s fibre optic cable network spans over 11,000 kilometers and supports a WiMAX 4G network covering 22 cities serving over 200,000 customers from 1,100.

Market share in stagnant industry

Wateen Telecom opted for an IPO in April 2010, aiming to expand infrastructure while rationalising its capital structure. The offering comprised 110 million shares, exclusive of a green shoe option of 90 million ordinary shares, issued at Rs10 par. Shares were oversubscribed by 82 per cent whilst the green shoe option was fully exercised. As one of the more successful IPOs to have taken place in 2010, the stock held much promise in its secondary market infancy. However, in recent times, the scrip has lost much of its demand as depicted by a 57 per cent fall in three-month trading volume on a YoY basis. Adjusting for systematic volume decline witnessed by the index in the same time frame, the drop in investor interest is still substantial. Accordingly, the share price has also dwindled 46 per cent YTD to stand at Rs1.6; a substantial 84 per cent discount to par value as at the last trading session prior to Eid. Wateen Telecom has lost out on repute in the broadband market due to stiff competition by other service providers such as PTCL, Worldcall, and Wi-tribe, which are competing to gain market share in a relatively stagnant industry.
During 2010, Wateen Telecom witnessed a change in the management induced by a change in the board structure with the appointment of two new directors. It was during this year that the sponsoring shareholders injected Rs2.1 billion worth of equity into the company to support struggling operations and indicating intention to further invest additional equity in the future. This was clearly an indication of significant challenges being faced on the business front by the company – a revelation confirmed as Wateen Telecom sought an extention for holding the board meeting to consider the submission of quarterly and half yearly accounts from the Karachi Stock Exchange until the end of September. From an investor’s perspective, this carries significant weight as Wateen Telecom currently faces a covenant in which it cannot declare a dividend until its financial ratios are in compliance with the loan agreement and this can only be determined when financial accounts have been submitted.

Contributor to
national exchequer

While the telecommunications industry has seen surging growth in the recent past and has been a substantial contributor to the national exchequer in terms of attracting foreign investment, the State Bank of Pakistan reports that during the 2010-2011 closing financial year, FDI in this sector has contracted by 79 per cent. The share of the telecom sector in overall foreign direct investment has contracted to merely five per cent over the 2010-2011 period as against 17 per cent during 2009-2010. This quantum of foreign direct investment is at par with 2003-2004 levels and mainly stems from stiff competitive structure where operators have frequently engaged in price wars while competing on costs. According to recent financials available for the quarter ended September 2010, Wateen Telecom posted revenues of Rs1,826 million which depict a decline of 23 per cent compared to the quarter ended September 2009. In addition, the company posted a loss of Rs317 million compared to a loss of Rs620 million in September 2009. This comes on the back of significant cost cutting measures adopted by the company as characterised by virtually all players in the telecom service segment. However, if the market data released by the Pakistan Telecommunication Authority is anything to go by, expectations of further loss reduction seem remote as the company has further lost ground in terms of customer base, which is likely to result in lower revenue, going forward.
According to SBP figures, foreign direct investment in the telecom sector was reported at Rs1.29 billion ($15 million) for the period July 2011. As per analysts, the telecom sector is expected to stabilise with the expectation of the up gradating and development of value-added services. The challenge, however, is the ability to gain investor confidence in an unstable economic and political environment as well as the tenacity to withstand competitive times. With WTCL having already lost much value over the past six months and with the current scenario in place, it is recommended to adopt a hold strategy until further information is released from the company and before any specific stock picking activity is undertaken.