PTCL’s consolidated earnings reflect true picture


Pakistan Telecommunication Co Limited (PTCL), the largest telecom operator, has underperformed the broader KSE-100 index by 33 per cent during 2011YTD, on concerns of its ailing fixed line business segment.
“However, we believe, that fixed line is only one-half of the PTCL coin and investors have overlooked the growth story in PTML (Ufone), PTCL’s 100 per cent owned cellular firm,” said Mohammed Millwala of Topline Securities.
Therefore, the analyst said, to capture the complete essence of Ufone’s story, the investors are advised to look at the company’s consolidated earnings rather than stand-alone which is usually announced at the Karachi bourse after the PTCL board meeting.
The disparity is obvious in the company’s recently announced 1QFY12 result in which company posted EPS of merely Rs0.28 on stand-alone basis versus consolidated EPS of Rs0.44. Interestingly the market reacted negatively by hearing the unconsolidated EPS numbers of Rs0.28.
In addition, our investment case is also driven from growth prospects of its broadband business (subscribers witnessed CAGR of 85 per cent in last 3-years) that has a potential to cushion the decline of fixed line. Overall, we expect company to post a double-digit increase in consolidated profitability of 20 per cent to reach EPS of Rs1.98 in FY12E. We have re-initiated our research coverage on PTCL with ‘Buy’ recommendation, as the stock is also available at attractive dividend yield of 16 per cent.
Investors must only look at consolidated statistics as Ufone is becoming a large part of PTCL. Due to the changing dynamics of telecommunication industry (fixed line to wireless technology), Ufone has become the spearhead of PTCL’s earnings growth. As per our estimates, the segment contributed approximately 47 per cent to company’s topline while, approximately 50 per cent of PTCL’ 1QFY12 consolidated EPS (Rs0.44) is attributed to Ufone. During FY12, we believe the pendulum would further swing towards Ufone, with Ufone’s estimated revenue to surpass that of its parent company and segment contribution to consolidated bottomline is estimated to stand around 68 per cent. Our conviction in Ufone potential stems from its stable growth in subscriber base coupled with turnaround in ARPUs (Average revenue per users). In addition to Ufone, broadband would also be the potential saviour for PTCL, going forward. Broadband segment has witnessed tremendous growth over the years, with subscribers growing by 3-year CAGR of 85 per cent. Though this growth could be attributed to a low base effect; nonetheless low broadband density of only 0.8 per cent compared to country’s total tele-density of 69 per cent leaves ample room for further growth. In 1QFY12 PTCL’s DSL, customer base increased by 9 per cent with a steady market share of 95 per cent. Therefore, with available growth room, we believe broadband would also shoulder the declining fixed line business. We estimate broadband to contribute approximately 8 per cent to the topline of the company in FY12. The segment growth prospects also stems from being the major beneficiary of company’s CAPEX programme. In the last 3-years, PTCL’s capital expenditure stood at Rs24bn with major expansionary projects like expansion of optical fibre network in Balochistan to acquiring VDSL2 bonding technology for high speed data transfer and many more all coming under the broadband segment. For the past 2-years PTCL has announced cash dividend of Rs1.75 per share accompanying 9-month result as against the traditional approach of announcing the result with that of full year result. We believe the deviation is on account of government’s efforts to limit its fiscal deficit. Furthermore, in line with this history we expect the company would announce a cash dividend of Rs1.75 per share in 3QFY12.