By: Elixir Securities Pakistan Private Limited
We initiate coverage on Pakistan Telecom Company Limited (PTC) with a HOLD stance. Our neutral stance on the stock emanates from constrained earnings growth for the company on account of 1) maturing traditional telephony revenue stream, 2) growth attrition of data segment (EvDO); by cellular broadband characterized by a highly competitive landscape, 3) constrained ARPU accretion as data led growth in the segment is insufficient to compensate for cannibalization of EvDO and 4) reduction of LDI rate which is unlikely to be compensated by increase in LDI traffic due to proliferation smart phones compatible with VoIP services like Skype, Whatsapp and Viber.
We opine that meaningful bottom-line enhancement on sustainable basis wouldn’t be possible in the current competitive landscape in the absence of restructuring of industry through mergers acquisition and withdrawals. After an initial surge in earnings due to uptick in ARPUs and decrease in finance cost, bottom line growth is likely to remain constrained, while EBITDA generation should remain high on account of hefty depreciation and amortization charge. However, elevated capex requirement would continue to weigh in on FCFE. Among the key upside risk, we flag progress on real estate issue between the sponsor and GoP or M&A deal in the telecom space as potential triggers for price performance.
Inflection point in the industry with data set to dominate revenue mix: Despite the maturing traditional revenue streams i.e. voice and texts, which we believe are related more to the paradigm shift towards VoIP, the growth opportunity remains potent with broadband penetration at a mere 87% in the country. With the proliferation of smart phones (from 13% in Jan13, market share increased to 31% in Jan15), the telecom regulatory authority estimates the subscriber base to grow at a 5yr CAGR of 26% and data to be an increasing part of the sales mix of telecom revenues.