AKD Securities Limited – PTC: 1QCY15F Result Preview

Karachi, April 14, 2015 (PPI-OT): After a disappointing CY14, AKD Securities Limited believes PTC is all set to make a comeback in CY15F particularly in the absence of one-off cost side pressures (VSS and fire-losses). However, on the core business front, AKD Securities Limited expects recovery to remain soft on account of 1) stiffening competition in the cellular space to restrict GMs to 33% in CY15F vs 32% in CY14, 2) certain regulatory measures that can potentially have a negative impact on cellular subscriber growth (Bio-metric verification, reduction in maximum no. of SIMs held by an individual) and 3) increase in finance cost. While 3G services have failed to provide any considerable support to margins as yet, AKD Securities Limited feels this is bound to change once the gestation period is over.

Also, encouraging 3G penetration level and subscriber growth (~8% of mobile phone connections have 3G services) further substantiates AKD Securities Limited’s thesis where AKD Securities Limited expects revenues from 3G service to clock in at PkR4.2bn in CY15F, contributing 4% to consolidated sales.

Thus, after incorporating the aforementioned factors in AKD Securities Limited’s valuations, AKD Securities Limited’s CY15F and CY16F earnings estimates now stand at PkR2.01/sh and 2.38/sh (down by an avg 5%) while AKD Securities Limited’s DR adjusted Dec’15 TP remains unchanged at PkR25.1/sh. Despite ICH being shelved, AKD Securities Limited cites effective cost management through frequent VSS initiatives (2 offerings in the last three years) and higher than anticipated subscriber growth/tariff revision on the 3G front as key positives to look out for.

1QCY15F Result Preview: PTC’s BoD is scheduled to meet on Apr15 ’15 to announce its 1QCY15F financial results. AKD Securities Limited expects the company to post 32% lower consolidated NPAT of PkR3.1bn (EPS: PkR0.59) in 1QCY15F vs. NPAT of PkR4.3bn (EPS: PkR0.85) in the corresponding period last year.

While revenues are expected to remain flat on a YoY basis to PkR33.1bn, GMs are estimated to go down by 300bps YoY to 36% in 1QCY15F as depreciation charge on account of license acquisition is likely to surge up cost.

The company’s cellular arm is expected to continue struggling and post a loss on its 1) inability to increase tariffs on account of tough competition, 2) subscriber loss on regulatory measures (bio-metric verification+ reduction in SIMs held by individuals) and 3) 7% YoY jump in finance cost.

Regulatory measures can be a potential concern: In a move to fight terrorism, the GoP with the help of cellular operators, completed a 3 month long re-verification drive across the country to get rid of all illegal SIMs. As per news report, a total of 103mn prepaid SIMs were supposed to be re-verified, however only 77mn of the total had been done so, leaving behind 26mn SIMs that are either to be blocked or disowned.

Taking cue from this, AKD Securities Limited’s back of the envelope working indicates a potential revenue loss of PkR11.2bn for Ufone assuming existing market share of 18.5%, in case all the remaining un-verified SIMs are blocked. However AKD Securities Limited believes the actual number of SIMs blocked to be less as the GoP has given another 180 days extension for SIM replacement. That said AKD Securities Limited waits for the release of official numbers before incorporation of the same in AKD Securities Limited’s model.

ICH terminated…what next? The ICH mechanism, which allowed PTC to terminate all international incoming traffic on its own network, stands dismantled as the arrangement failed to curb grey traffic. Instead, higher call rates post ICH (up by 340% to US$0.08/min) incentivized cheaper illegal calls and shift onto VoIPs, thus bringing down incoming minutes by ~70% to 300mn min/mth at present. Now, with call rates expected to take a sharp nosedive ranging between USc1.5-2.5/min, AKD Securities Limited expects traffic to return to pre-ICH levels at ~1bn min/mth, although slowly as the LDI operators re-open their infrastructure.

As AKD Securities Limited’s base case assumed ICH terminated, AKD Securities Limited sees no impact of the said development on AKD Securities Limited’s valuations.

Investment Perspective: At AKD Securities Limited’s Dec’15 TP of PkR25.1/sh, AKD Securities Limited have an Accumulate stance on the scrip providing an upside of 6%. Based on projected double digit earnings growth in CY15F and VSS out of the way, AKD Securities Limited flags any near-term price volatility as an opportunity to add PTC. The stock has gained a muted 3% CYTD to trade at a forward P/E multiple of 11.7x and offers a decent dividend yield of 8.5%.

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