Thursday, December 23, 2010

Equity Research Pakistan

In Focus Wateen – Analyst Briefing Takeaways

Fixed Line Telecommunication ƒ WTCL is expected to reflect injection of PKR3.9bn (~USD45mn) by the
parent group by Dec10; this includes sale of dues from African
WTCL operations to a related party for cash consideration

Current Price: PKR 3.5 ƒ The company is to use proceeds from the IPO (PKR2.0bn) and injection
by the parent to reduce its leverage
Omar Rafiq
omar.rafiq@bmacapital.com ƒ Although this is likely to reduce financial charges in the short to
medium term, grey telephony is likely to persist and thus LDI business
Stock Statistics profitability will remain a concern
Ticker WTCL ƒ USF subsidy disbursement is likely to be recieved on a normalized
Mkt Cap USD mn 27 mechanism despite delays encountered earlier
6M ADT mn shares 0.3
ƒ The stock currently trades at PBV multiple of 0.6x compared to its peer
Shares Outstanding mn 617
PTC which trades at 1.0x; while the stock is not under active coverage,
we will look to keep our investors updated on the changing dynamics of
Stock Performance
the company
1M 3M 12M
Absolute % -0.8 -6.7 -40.9 Since its IPO at PKR10.0/share, Wateen Telecom (WTCL) has significantly
Relative to KSE % -8.8 -25.3 -63.6
underperformed the market with its current market value of share standing at
PKR3.75/share.
To allay investor concerns regarding profitability, leverage, liquidity and business
Price and Volume Graph
risks, the company conducted an analyst briefing yesterday (December 22, 2010).
Volume mn(RHS) Price PKR(LHS)
8.0 6.0 Abu-Dhabi Group’s Helping hand: PKR3.9bn Injection
7.0 5.0 One of the prime concerns for the company has been its rising leverage and
6.0 4.0 reducing ability to fund its liabilities. The company closed its FY10 and 1QFY11
5.0 3.0 with PKR12.5bn debt settled into current portion of long term financing owing to its
4.0 2.0
inability to make payments to lenders. The company has been under negotiations
3.0 1.0
with the parent Abu-Dhabi Group recently whereby the group’s injection of
2.0 0.0
PKR3.9bn (USD45mn) to WTCL is likely to be reflected in Dec10 accounts. This
Oct-10

Nov-10
May-10

Jun-10

Jul-10

Aug-10

Sep-10

coupled with PKR2.0bn raised through the IPO and Universal Service Fund (USF)
dues is likely to result in the company meeting its liability funding requirement in
the short run.
WTCL vs KSE100 Relative Index Chart
Injection of PKR3.9bn includes, in part, settlement of dues from African based
KSE100 Index WTCL
related parties which is to be sold to a group company in India for cash
130 consideration. As of FY10 end, dues from African operations stood at PKR1.1bn
115 and the same is to be treated as equity injection.
100

85
USF and Grey Telephony: Rewards and Risks still on the cards
70 WTCL has been awarded PKR2.8bn in USF subsidy for network/coverage
55 expansion. The management highlighted that the subsidy was delayed owing to
40 floods which ravaged though the country during most part of 1QFY11. However,
May-10 Jul-10 Sep-10 Nov-10 due to significant improvement in terrain in the post flood scenario as well as

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan
For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111
1 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information
contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as
such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or
solicitation of any offer to buy or sell the securities mentioned.

Equity Research Pakistan
In Focus
Fixed Line Telecommunication
2 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information
Thursday, December 23, 2010
further resolved USF disbursement issues, it is expected that dues are likely to be
cleared on a much smoother basis.
With the issue of grey telephony, the management expressed its concerns as
traffic continued to be routed through various undocumented mechanisms which
was resulting in shortfall of revenue. Further, it was indicated that the issue is
unlikely to be resolved in the short run to medium run and thus is one of the key
risks to business profitability generated by the LDI segment.
Near term concerns persist, outlook improves on reduced leverage
and new fiber rollout
Injection by parent, reducing leverage and expanding coverage all point in the
right direction for the company. While this is likely to improve liquidity for the
company, we believe that grey telephony and increased depreciation charges are
likely to be an investor concern in the short run. Moreover, roll out of new fiber
projects and materialization of USF subsidy is likely to help add to revenue base in
the medium to long term.
The stock currently trades at PBV multiple of 0.6x compared to its peer Pakistan
Telecommunication Company (PTC) which trades at 1.0x (40% discount to peer
valuation). While the stock is not under active coverage, we will look to keep our
investors updated on the changing dynamics of the company.
BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan
For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111
contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as
such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or
solicitation of any offer to buy or sell the securities mentioned.