By: BMA Capital Management Limited
Pakistan Telecommunication Company Limited (PTC) has underperformed the KSE‐100 index by 10% since Jun’15. The underperformance comes on the back of decline in profitability where the company’s 1HCY15 consolidated profitability declined by 61%YoY to PKR3.2bn (EPS: PKR0.6). The decline in earnings comes on back of decline in profitability of its subsidiary PTML which announced a loss of PKR2.9bn (LPS: PKR0.57). Going forward, we do not see any significant improvement in the profitability on back of cut throat competition in cellular arena as PTML has been losing its customer base to competition. The imposition of new taxes on telecom sector by provincial governments in the budget FY16 also does not bode well either; especially for the 3G/4G services which only debuted in the country last year and may cap the growth potential of these segments going forward.
Since its inception, 3G/4G services have posted robust growth and the customer base has increased rapidly with the total subscribers base now at 14.6mn. However, U‐fone’s share has contracted to only ~18% against ~22% it stood earlier in the year. The valuations have opened up on back of significant underperformance by the scrip and the stock offers a total return of 40% on last closing.
Disappointing trend in profitability: PTC’s consolidated earnings clocked at PKR3.2bn (EPS: PKR0.6), posting a decline of 61%YoY. The decline in earnings came on the back of poor profitability of the subsidiary company, PTML, which posted a loss of PKR2.9bn (LPS: PKR0.57). In this regard, the top‐line of the company declined by 11%YoY as the consumer base of the subsidiary contracted to 17.9mn subscribers (down 27%YoY) while the ARPUs only increased by 4%YoY. The gross margins of the subsidiary also remained under pressure due to higher depreciation and amortization expense.