january 03, 2011 pakistan telecommunication company ... · january 03, 2011 pakistan...

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Company Report January 03, 2011

Pakistan Telecommunication Company Limited Fixed Line Telecom. Ufone driving the growth

We are initiating coverage on Pakistan Telecommunication Company Limited (PTC) with a DCF based Dec 2011 target price of PKR 24.7/share. At last closing price (December 31, 2010) of PKR 19.42/share, the scrip offers an upside potential of 27% to our target price. The scrip is currently trading at a FY11 P/E of 7.8 and offering prospective FY11 dividend yield of 8.8%. Our Target price is derived from consolidated operations as we believe it rightly reflects company’s growth prospects, which are primarily emanating from Ufone operations. While fixed line operations continued to face the declining trend.

Cellular Segment to drive PTC’s growth Ufone’s revenue has grown at a CAGR of 31% during FY06-10 to PKR 41.7bn, hence Ufone’s contribution in PTC’s top line has surged to 42% in FY10 from just 16% in FY06. We expect this trend to persist, resulting in cellular contribution to increase to 45% in FY11 and further to 49% by FY14, as company’s consolidated revenue grows at a CAGR of 4.8% from FY10 to FY14. We expect Ufone to sustain its market share at 20%. This strong growth in Ufone is expected to take PTC’s consolidated top line to PKR 118.8bn, exhibiting a 4.7% CAGR (FY10-14)

Revenues from FLL, WLL and Broadband By FY10, PTC’s standalone revenues (including Domestic, International, Vfone and Broadband) have registered a decline of 14% since FY08. This contraction is mainly attributed to decline in Fixed Line revenues, which has dropped from PKR 57.47bn in FY08 to PKR 43.57bn by FY10, a decline of 24%. We expect PTC’s revenues (excluding Ufone) to depict a decline of 2.6% YoY in FY11 to PKR 55.7bn compared to a drop of 3.5% YoY in FY10. Going forward, we expect revenues (excluding Ufone) of the company to grow at a CAGR (FY11 - FY14) of 2.9% mainly on the back of the rising WLL and broadband revenues.

Technical Services Fee to end in FY12 As per the terms of Technical Service Agreement (TSA), Etisalat is allowed to charge technical service fee at 3.5% on the consolidated revenues of the company for a period of 5 years, commencing from October 2006. The tenor of this levy will expire in 1QFY12, which is expected to lead to 17% decline in admin expenses in FY12.

Ufone to Support PTC’s standalone profitability PTC received first dividend flows from Ufone of PKR 695mn in FY10, contributing around 13.5% towards company’s other income. Going forward, rising dividend income will provide some relief to the declining profitability of PTC, which is suffering from sliding fixed line revenues. We expect dividend of PKR 650mn (PKR 0.13/share) from Ufone in FY11. Moreover, PTC’s loan to Ufone of PKR 11bn will further boost company’s profitability on standalone basis as the company will book interest income of PKR 1.6bn (PKR 0.31/share) in FY11.

PTCL Financial Highlights (PKRmn) FY09A FY10A FY11F FY12F FY13F Revenues 92,720 98,906 101,996 107,394 112,620 Net Profit 10,923 12,750 11,679 13,515 13,515 EPS (PKR) 2.14 2.30 2.48 3.00 3.31 DPS (PKR) 1.50 1.75 1.70 1.80 1.80 Dividend Yield 7.7% 9.0% 8.8% 9.3% 9.3%

P/E 9.07 8.43 7.84 6.48 5.86 ROE 10.4% 10.9% 11.3% 12.9% 13.4% Source: Company Accounts and AHL Research

Target Price (PKR/share)

Last Closing (PKR/share)

Upside

KSE CodeBloomberg CodeReuters Code PTCA KA

Outstanding Shares (mn) 5,100 Market Cap (US$ mn) 1,155 Market Cap (PKR mn) 99,042 Free Float 15%12M Avg. Daily Turnover 3.74mn12M High/Low (PKR) 22.3/17.0

Source: Company accounts

Source: KSE

AnalystFaisal [email protected]

PTC PA

Key Data

Shareholding

Stock Performance

www.arifhabibltd.com

PTC

BUY24.7019.42

27.2%

Etisalat Internati

onal26.0%

GoP62.2%

Individual

1.9%

Others9.9%

90%95%

100%105%110%115%120%125%130%

Dec

-09

Jan-

10M

ar-1

0

Apr-1

0M

ay-1

0

Jun-

10Ju

l-10

Aug-

10

Sep-

10O

ct-1

0

Nov

-10

Dec

-10

PTCKSE100

2

Pakistan Telecommunication Company Limited

Table of Content

Valuation 3

Cellular Segment to drive PTC’s growth 4

Fixed Local Loop - Continue to lose its grace 6

Wireless Local Loop - In full swing after a breather 7

Broadband in top gear 8

Long Distance & International (LDI) 9

Revenues from FLL, WLL and Broadband 9

Company Background 11

3


Valuation We have used the Discounted Cash Flow (DCF) methodology to value the company. Our June 2011 Target price of PKR 24.7/share is derived through terminal growth rate of 2% and a WACC of 19.0%. In WACC computation, the CAPM based calculation of the cost of equity (Re) of 20.5% (Risk free rate of 14%, Risk premium of 6% and beta of 1.05) while Cost of debt is 10.4%. At closing price of PKR 19.4/share, the scrip offers an upside of 27% to our target price Buy

Discounted Cash Flow Valuation

PKR mn

FY11 FY12 FY13 FY14 FY15 Terminal

EBIT

14,503 16,839 18,051 19,380 20,506 Depreciation

21,190 22,793 24,492 26,343 27,694

Net change in Working Capital

2,965 4,483 1,176 2,469 827 Capex

(19,620) (24,078) (25,787) (27,991) (29,613)

Free Cash Flow

19,037 20,037 17,933 20,201 19,414 116,421

WACC

19.0% 19.0% 19.0% 19.0% 19.0% 19.0%

Present Value

19,037 16,829 12,655 11,979 9,674 58,009

Terminal Growth Rate 2.00% NPV 70,174 NPV of Terminal Value 58,009 Enterprise Value 128,183 Less: Net Debt 13,000

Equity Value 115,183 No. of Shares (mn) 5,100 Dec 2011 Target Price 24.7

Sensitivity to Discount Rate and Terminal Growth Rate

Target Price Sensitivity to Discount Rate and Terminal Growth Rate

Terminal Growth Rate 1.0% 1.50% 2.0% 2.50% 3.0%

Risk

Fre

e Rat

e

12.0% 26.2 26.7 27.2 27.8 28.4 12.5% 25.6 26.0 26.5 27.1 27.7 13.0% 25.0 25.4 25.9 26.4 26.9 13.5% 24.4 24.9 25.3 25.8 26.3 14.0% 23.9 24.3 24.7 25.2 25.6 14.5% 23.4 23.8 24.2 24.6 25.0 15.0% 23.0 23.3 23.7 24.1 24.5

4


Cellular Segment to drive PTC’s growth The growth in cellular subscriber has completely changed the dynamics of telecommunication in Pakistan. This change transpired in 2003, when PTA sold two licenses for cellular services, which were acquired by Telenor and Warid. Since FY06, the subscriber base has grown at a CAGR of 30%, increasing number of subscriber, from mere 34.5mn to 99.2mn by FY10. Subsequently, cellular teledensity converged from just 20.2% in FY06 to 60.4% in FY10. As per latest telecom numbers released by PTA, the base has increased to 100.7mn by October 2010, an increase of 1.5% since June 2010, resulting in teledensity to reach 60.5%.

The growth in subscriber base has slowed down drastically on account of economic turmoil, more restrictive regulatory requirements in issuance of SIMs and cancellation of a large number of inactive SIMs for security reasons, which were issued without verification. Moreover, since urban areas have become highly competitive and saturated as well, cellular companies are more focusing towards un-served rural areas for growth. The major share in subs base is held by Mobilink with 31.2% followed by Telenor and Ufone with 23.9% and 20.0% share, respectively. Going forward, we expect subs base to register a growth of 2.5% in FY11 to reach 101.7mn.

Cellular Subscribers Market Share

Source: PTA Source: PTA

Ufone subscriber base witnessed an attrition of 2.3% in FY10 however since then it has augmented by 3.3% to reach 20.2mn by October 2010. The decline in FY10 mainly emanated from procedure for recognition of active SIMs and competition from the peers. In order to contain declining trend, the company has initiated aggressive marketing strategy through competitive packages. Going forward, we expect Ufone to sustain its market share at 20% in the coming years as its subs are estimated to grow at a CAGR of 2.9% during FY10 – FY14.

88.0

94.3

99.2100.7 101.7

80

85

90

95

100

105

FY08

FY09

FY10

Oct

-10

FY11

E

mn

Mobilink, 31.23%

Ufone, 20.0%Telenor, 23.9

5%

Warid, 17.0%

Zong, 7%

Cellular teledensity

Source: PTA and AHL Research

Ufone Subscribers

Source: PTA

39.9%

54.6%

58.2%

60.4%

61.1%

30.0%

40.0%

50.0%

60.0%

70.0%

FY07

FY08

FY09

FY10

FY11

F

18.1

20.019.5

20.2 20.3

16.5 17.0 17.5 18.0 18.5 19.0 19.5 20.0 20.5 21.0

FY08 FY09 FY10 Oct-10 FY11E

mn

5


Ufone Operating Performance Ufone’s revenue has grown at a CAGR of 31% since FY06 to PKR 41.7bn by FY10. Consequently, Ufone’s contribution to top line of PTC has jumped from 16% in FY06 to 42% in FY10 as revenue’s from fixed line operation continue to slide. However, stiff competition among the cellular companies has led to lower margins on account of declining Average Revenue per User (ARPUs), which subsequently has led to calls for mergers and acquisitions within the industry. Moreover, PTA has been reducing mobile termination rates from 1.2/minute in 2008 to PKR 0.90/minute in January 2010, which has further put constrained on cellular companies. Considering this drastic situation, the company has came out with an aggressive marketing strategy and competitive rates through targeted packages for clients. This has paid dividends as it has resulted in stabilizing ARPUs for the company. Moreover, the company is placing more emphasis on providing Value Added Services (VAS), which generates higher ARPUs compared to voice services. We expect this trend to persist, resulting in cellular contribution to increase to 45% in FY11 and further to 49% by FY14, as company’s consolidated revenue grows at a CAGR of 4.8% from FY10 to FY14.

Ufone’s Revenues

Source: Company Accounts and AHL Research

Infrastructure Sharing Agreement Recently, all 5 cellular mobile operators (CMOs) and PTA signed MoU on infrastructure sharing for 3 years, which can be extended further with mutual consent of the parties. This came about as rising operating and capex costs have been continuously shrinking margins. Moreover, it will reduce capital cost requirement for infrastructure development. The MoU is targeted to improve tower sharing ratio from current level of 1.02 to 1.5 in next 3 years (1st year 1.1 and 2nd year 1.3). In India its regulator has made mandatory for the cellular companies to share their infrastructure. We believe that this is a step in right direction as it will help CMOs in reviving their declining profitability. Ufone in 2008 signed a similar agreement with Warid for infrastructure sharing including sites and towers for 10 years. Ufone currently operates 5,713 cell sites while industry’s total sites stand at 30,126.

Launch of 3G Spectrum PTA for long has been vying to launch 3G spectrum in Pakistan. 3G (Third Generation) is a category of next generation mobile networks that operates at a higher frequency and a larger channel bandwidth, which enables to support high data transmission rates. Major hurdle in delay of launch of this technology, apart from some time away from maturing consumer’s demand, is lack of enthusiasm on the part of mobile operators. This reluctance is emanating from declining ARPUs on account of stiff competition with in the industry which is hindering big cash roll out considering higher capex requirement

36%

38%

40%

42%

44%

46%

48%

50%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

FY08A FY09A FY10A FY11E FY12F FY13F

PKRbn

6


for the technology. We expect that the mobile operators will prefer to delay this launch until economic situation improves and consumers demand and their affordability picks up.

Ufone to Support PTC’s on standalone Profitability PTC received first dividend flows from PTML (Ufone) of PKR 695mn from in FY10. contributing around 13.5% toward company’s other income. We expect the dividend flows from the subsidiary, PTML, will continue to rise as its profitability has more than doubled since FY08. We believe this dividend income will provide support to the company’s declining bottom line due to sliding fixed line revenues. Moreover, PTC’s loan to Ufone to the tune of PKR 11bn will further boost company’s profitability on standalone basis. The repayment of these loans will commence after grace period of 3-4 years. The company is expected to earn interest income to the tune of PKR 1.62bn in FY11, resulting in pre tax contribution of PKR 0.32/share.

Dividends and interest on loans from Ufone PTC Standalone EPS

Source: Company Accounts and AHL Research Source: Company Accounts and AHL Research

Fixed Local Loop - Continue to lose its grace Fixed Local Loop (FLL) is the oldest communication segment in Pakistan and it had historically remained completely regulated by the government through sole operator Pakistan Telecommunication Company Limited (PTC). The GoP in pursuance of its deregulation policy in 2003 issued 84 licenses to 37 operators, with an objective to increase competition, teledensity and quality of service. However, due to high capex requirement only 2-3 companies started FLL operations while others preferred to remain idle or choose to invest in Wireless local loop (WLL). By FY09 PTA has cancelled 34 FLL licenses of 17 operators because of noncompliance with the requirements after acquisition of license.

FLL subscribers’ base started shrinking from FY06 (5.24mn) and since then segment has contracted by 35% to 3.42mn by FY10. Consequently, segment’s teledensity has dropped to 2.16% compared to 3.37% in FY06. This attrition is attributed to easier availability and cheaper rates from cellular and WLL segments. PTC continues to hold the largest stake (FY10: 95.6%) in the FLL segment, though its share is continuously on the decline as its customer’s base has contracted by 23% to 3.42mn in last 2 years. The second largest stakeholder in FLL segment is with National Telecommunication Corporation (NTC) which currently holds 3.1% market share compared to 2.3% in FY08. NTC was established with a purpose to have an independent infrastructure from other operators that will be utilized for government communication. We expect the fixed subscriber base would continue its downward trend, declining at an average of 1.0% pa while fixed line teledensity is anticipated to hover around 2.0% by FY12 compared to

-

500

1,000

1,500

2,000

2,500

FY09A FY10A FY11E FY12F

Dividend from Ufone Interest on loans to UfonePKR mn

1.79 1.82 1.83

1.97

1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 2.10

FY09A FY10A FY11E FY12F

PKR

FLL teledensity

Source: PTA and AHL Research

3.04%

2.70%2.20%

2.16%

2.08%

2.00%1.50%

2.00%

2.50%

3.00%

3.50%

FY07

FY08

FY09

FY10

FY11

F

FY12

F

7


current level of 2.16%. While PTC market share is expected to remain in the region of 95.5%.

FLL subscriber base Company wise share

Source: PTA and AHL Research Source: PTA

Wireless Local Loop – In Full swing after a breather Since its launch in 2004, Wireless Local Loop (WLL) has become a major growth driver for the telecom industry. The major objective of PTA for introduction of WLL service was its cost effectiveness, relatively easier deployment in unserved areas and its low maintenance cost. Nevertheless, due to its voice clarity and easier to acquire a connection, it became preferred choice of urban consumers as well. WLL coverage has expanded to 11,669 cities and villages after PTA awarded 93 licenses to 16 operators for 14 regions in 2003

WLL subscriber’s base grew by 1.6% in FY10 to reach 2.66mn compared to a staggering rise of 16% YoY in FY09. This slowdown is mainly on account of teething issues being faced by operators, competition from cellular providers and slow rollout of services. Nevertheless by October 2010, WLL operators managed to further increase their subscribers by 9% since FY10, with the teledensity reaching to 1.6%. Going forward, we expect the WLL subscribers to surpass 3.0mn market by FY11, depicting a growth of 13% YoY. The WLL subscriber base is expected to outgrow FLL consumers by FY15.

WLL Subscriber Base Market Share 4MFY11

Source: PTA and AHL Research Source: PTA

Segment wise analysis of October 2010, depicts that PTC’s Vfone continues to hold major share with 1.28mn users and a market share of 45.3% (FY10: 46.4%). Due to stiff competition, mainly from Telecard and Wateen, the company’s subscriber base had witnessed an attrition of 5% YoY in FY10. As per latest numbers, Telecard’s and

5.244.81

4.42

3.52 3.42 3.38 3.35

0.00

1.00

2.00

3.00

4.00

5.00

6.00

FY06 FY07 FY08 FY09 FY10 FY11F FY12F

mn

93%

94%

95%

96%

97%

98%

99%

100%

FY05 FY06 FY07 FY08 FY09 FY10Naya Tel Union Comm World Call Brain Limited NTC PTCL

1.70

2.24

2.62 2.66 2.83

3.00 3.08

1.00

1.50

2.00

2.50

3.00

3.50

FY07 FY08 FY09 FY10 Oct-10 FY11F FY12F

mn

PTCL, 45.35%

TeleCard, 24.86%

World Call, 20.64%

Zong, 7%

Link Direct, 1.10%

WLL teledensity

Source: PTA

0.7%

1.1%

1.4%1.6%

1.6%

0.4%

0.8%

1.2%

1.6%

2.0%

FY06 FY07 FY08 FY09 FY10

8


Wateen’s share rose to 24.9% and 7.7% from 23.7% and 2.75% in FY09, respectively. PTC, considering growing competition, is striving to maintain its market share through the introduction of flexible tariffs and streamlined packages in WLL. We expect the PTC’s WLL subscriber base to reach 1.35mn by FY11 register a growth of 9% YoY. Broadband in Top Gear Broadband connections have grown by 4 times since FY08 to reach 0.99mn by October 2010. Digital subscriber Line (DSL) technology continues to hold approximately 50% share in the total subscribers base. However, growth in other broadband wireless segments (WiMax and EvDo), which are considered future of broadband because of their efficient and technological advancement, have outpaced fixed line technologies.

PTC, on the back of its fixed line infrastructure, continues to hold the largest share in DSL segment. Its share has grown from 76% in FY09 to 88.5% in FY10 as its subscriber’s base has augmented by 2.1times to reach 422,000. Moreover, the company under Universal Service Fund (USF) was allocated project to provide 64,000 new DSL connections in the rural areas of Southern Punjab. The company has also increased its presence in wireless broadband segment through launch of EVDO (Evolution, Data Optimized) services which saw its base to grow by 4 times to reach 52,387. Recently, PTC introduced EVDO Revision.B with a speed of 10Mbps. We expect PTC’s broadband subscriber base to reach to 0.72mn by FY11 from 0.52mn in FY10. Broadband’s revenues are expected to reach PKR 7.6bn which consequently will increase its share in total revenues from 6.6% in FY10 to 7.5% in FY11, hence supporting the company’s unconsolidated top-line as fixed line segment is continuously shrinking.

Broadband Subscriber Base Technology based Share 3MFY11 Company-wise Share FY10

Source: PTA and AHL Research Source: PTA Source: PTA

Growth through Acquisition PTC acquired Maskatiya Communications (Pvt.) Limited (Maxcom) in March 2010. Maxcom was involved in the business of providing broadband (DSL) services in Karachi and some parts of Hyderabad. According to the company the customer base of Maxcom currently stands at 6,000. This acquisition is being done on revenue sharing basis, from March 2010 to August 2012. The cumulative amount during this period would become consideration for this acquisition. PTC booked payable of PKR 74.5mn by end of FY10 under the said terms. We believe post expiry of revenue sharing agreement the company would merge Maxcom subscribers and assets with its broadband segment.

168

414

901 995

1,350

-

200

400

600

800

1,000

1,200

1,400

1,600

FY08 FY09 FY10 Sep-10 FY11F

'000

DSL, 49.1%

HFC, 4.0%

WiMAX, 29.4%

FTTH, 0.6%

EvDO, 0.1%

Wateen, 21% Worldcall,

11%

Witribe, 6%

LinkDot, 4%

Others, 5%PTCL, 53

%

Broadband Penetration

Source: PTA

2% 3% 11%

25%

55%

0%

10%

20%

30%

40%

50%

60%

FY06 FY07 FY08 FY09 FY10

9


Long Distance & International (LDI) The scenario for LDI operations changed completely after issuance of licenses in 2004 by PTA. Before the deregulation of the telecom sector, PTC used to manage all LDI traffic being the sole operator and government owned entity. The PTA issued 14 LDI licenses in 2004 out of which 9 are currently active. LDI licensee is responsible to maintain and operate a public fixed switched network for a nation-wide long distance and international telephony service. LDI operators’ returns are based on Approved Settlement Rate (ASR), determined by PTA.

PTC on the back of its Fixed line operations remains the largest stakeholder in LDI segment. PTC LDI revenue declined from PKR 9.9bn in FY07 to PKR 5.6bn in FY08 due to reduction in ASR by PTA and rising grey traffic. Considering drastic situation, PTA streamlined settlement rates, increasing them from US cents 7.5/min to US cents 10/min, revising APC to US cents 5.0/minutes. Moreover, PTA deployed Monitoring and Reconciliation of International Telephony Traffic (M&RITT) systems which helped in detecting illegal call terminations. This resulted in LDI contribution in the total telecom sector revenue growing from 8% in FY08 to 13% in FY10. PTC, in order to impede declining revenue trend from LDI operations, introduced economical packages for international dialing apart from revising its international dialing tariff. These steps further improved LDI traffic on the company’s network, resulting in augmentation in FY10 revenues by 26% YoY to PKR 7.1bn compared PKR 5.6bn in FY08. Given PTA’s continued stringent measures to curb grey traffic, PTC’s LDI revenues are expected to register a rise of 1.1% in FY11 and subsequently are expected to grow at a CAGR (FY10-13) of 3.1%.

Revenues from FLL, WLL and Broadband By FY10, PTC’s standalone revenues (including Domestic, International, Vfone and Broadband) have registered a decline of 14% since FY08. This contraction is mainly attributed to decline in Fixed Line revenues which has result dropped from PKR 57.47bn in FY08 to PKR 43.57bn by FY10, a decline of 24%. Hence contribution of Fixed Line towards consolidated revenues have dropped from 63% in FY08 to just 44% in FY10. In order to sustain the plunge in revenues from fixed-line segment, the company has introduced bundled packages for local and international calls, streamlined their tariffs, introduced value added services like DSL, SmartTV and tailored packages for corporate clients. Moreover, the company from 3QFY10 has revised its local call pulse rate from 3-minute call of PKR 2 to a per minute call for PKR 1. While for corporate clients, it has recently introduced unified communication, wherein they will be able to access voice/data/sharing services regardless of time and location.

LDI Revenues


5,632

6,200

7,094 7,208 7,610

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

FY08A FY09A FY10A FY11E FY12F

PKRmn

10


Confluence of these packages shall result provide impetus to the declining revenues going forward while growth factor will emanate from WLL segment and curbing grey traffic would result in improved international revenues. We expect PTC’s revenues (excluding Ufone) to depict a decline of 2.6% YoY in FY11 to PKR 55.7bn compared to a drop of 3.5% YoY in FY10. Going forward, we expect revenues (excluding Ufone) of the company to grow at a CAGR (FY11 - FY14) of 2.9% mainly on the back of the rising WLL and broadband revenues.

Technical Services Fee to end in FY12 Under the Technical Service Agreement (TSA), Etisalat has been allowed to charge Technical service fee at 3.5% on the consolidated revenues of the company for a period of 5 years, commencing from October 2006. The company books this fee under Administrative and General Expenses. The tenor of this levy will expire in 1QFY12 which is expected to lead to 17% decline in admin expenses in FY12 and consequently, 17.8% rise in company’s earnings. However, if Etisalat decides to continue charging technical fee post 1QFY12, it would result in 12% decline (PKR 0.36/share) from our base case earnings estimates of PKR 2.96/share in FY12.

Real Estate issue – Continues to persist In July 2005, Etisalat (UAE) acquired 26% stake and management control of PTC with an understanding to pay USD 2.6bn. However, so far only USD 1.8bn has been paid by Etisalat, while remaining amount of PKR 800mn were withheld due to of non-transfer of more then 3,300 properties which as per terms of sales purchase agreement (SPA) was to be transferred to PTC by March 2008. The GoP have transferred about 3,000

Standalone Revenues and Gross Margins


Admin and General Expense


15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0


PKRbn Revenue Gross Margin

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000


Cost of Services Technical FeePKR mn

11


properties while about 296 continues to remain under dispute, due to ambiguity with regards to ownership as they are also being claimed by provincial governments of Sindh and Punjab. We do not foresee any solution on this account in near term; consequently this issue would likely linger on.

Growth factor from Universal Service Fund (USF) The GoP established Universal Service Fund (USF) in order to increase telecos penetration in the country, especially, in the rural and underdeveloped areas. The main objective was to shift the focus of the telecom operators from urban towards rural population coverage. The funds are generated by charging specific rate, known as Access Promotion Charge (APC), on all incoming international traffic that is terminated on LL and Mobile Networks. However, incase of cellular companies (including Ufone), APC is transferred towards USF. The GoP is currently charging APC at USD 0.05/min. According to recent reports, GoP has decided to utilize APC collected from mobile operators (USF-M) for curtailing grey traffic. The collected fund will be provided to mobile operators to procure system to check grey traffic and monitoring capability of International Mobile Equipment Identity (IMEI) regime.

PTC, since it’s an LDI licensee, apart from ASR also retains all the APC for calls that are terminated on its network. The company is actively working under the USF facility and by May 2010 it’s share under USF has crossed 50% followed by Wateen with a share of 19%. By end of FY10, total number of USF contracts awarded to PTC reached 13 including pilot project for increasing broadband penetration in Faisalabad Telecom region (FTR) – excluding Faisalabad city. The Faisalabad project is expected to generate 72,500 new DSL connections covering 7 districts of FTR. However, as PTC crossed 50% accumulated subsidy benchmark it would result in restriction on allocation of any further project under USF. This will last till the benchmark is reduced to required levels.

Company Background Pakistan Telecommunication Company Limited (PTC) was incorporated in December 1995. After its incorporation the government transferred all business and assets of Pakistan telecommunication Corporation under the Pakistan Telecommunication Reorganization Act, 1996 to PTC. The company is the largest telecom conglomerate in the country, offering wide range of services including Fixed line, Cellular, Wireless and Broadband. Moreover, it is also offering vale added services like Smart TV. PTC also owns stakes in 3 submarine cable system which provides largest backbone for connectivity to outside world apart from largest fiber optic network within the country.

The company’s authorized share capital is PKR 150bn which is divided into 1,100mn class "A" ordinary shares (traded on stock exchange) and 3,900mn class "B" ordinary share (reserved for strategic investors and are held by the government). The class “B” shares “have four voting rights per share. The company paidup capital stands at PKR 51bn comprising of 3.77bn class "A" ordinary shares and 1.33bn class “B” shares. Government privatized PTC in July 2005 through divestment of 26% stake of Class “B” shares and management control. The company was acquired by Etisalat Telecommunication Corporation through its subsidiary Etisalat International Pakistan.

12


Income Statement FY09A FY10A FY11F FY12F FY13F PKRmn

Revenues 92,720 98,906 101,996 107,394 112,620

Cost of Services 55,154 62,213 64,858 68,892 72,985

Gross Profit 37,566 36,693 37,138 38,502 39,635

Admin and Marketing Expense 21,485 20,042 20,710 18,849 18,760

Operating Profit 16,081 16,651 16,429 19,654 20,875

Voluntary Separation Scheme 92 - - - -

Non-Operating Income 5,224 5,277 5,883 6,253 6,896

Finance Cost 4,473 3,293 2,868 2,405 1,786

Profit before Tax 16,739 18,635 19,444 23,501 25,985

Net Income 10,923 11,746 12,639 15,276 16,891

EPS 2.14 2.30 2.48 3.00 3.31

Ratio FY09A FY10A FY11F FY12F FY13F

EPS 2.14 2.30 2.48 3.00 3.31

P/E 9.0 8.4 7.8 6.5 5.8

DPS 1.50 1.75 1.70 1.80 1.80

Dividend Yield 7.7% 9.0% 8.8% 9.3% 9.3%

BVPS 20.64 21.19 21.97 23.16 24.68

P/B 0.94 0.91 0.88 0.84 0.78

ROE 10.4% 10.9% 11.3% 12.9% 13.4%

ROA 5.1% 5.6% 6.2% 7.4% 7.7%

Gross Margin 40.5% 37.1% 36.4% 35.9% 35.2%

Operating Margin 17.3% 16.8% 16.1% 18.3% 18.5%

Net Margin 11.8% 11.9% 12.4% 14.2% 15.0%

Balance Sheet FY09A FY10A FY11F FY12F FY13F PKRmn

Property, Plant and Equipment 145,208 152,083 150,725 152,205 153,708 Other Non-Current Assets 4,306 4,163 3,969 3,760 3,555 Trade Receivables 10,876 10,385 10,886 10,698 11,218 Cash & Cash Equivalents 42,203 23,566 28,722 30,653 39,502 Other Current Assets 8,800 7,343 5,696 6,199 6,744 Total Assets 215,140 208,070 203,999 207,538 218,601

Paid up Capital 51,000 51,000 51,000 51,000 51,000 Reserves 32,183 32,614 32,614 32,614 32,614 Unappropriated Profit 22,070 24,461 28,430 34,525 42,236 Long Term Liabilities 47,096 52,867 40,537 42,161 39,421 Trade Payables 31,918 33,698 34,195 38,935 40,948 Other Short Term Liabilities 30,872 13,431 17,223 8,302 12,383

Total Liabilities and Equity 215,140 208,070 203,999 207,538 218,601

13


Cash Flow Statement FY11F FY12F FY13F PKR mn

PBT

19,444 23,501 25,985 Depreciation

21,190 22,793 24,492

Changing in Working Capital

2,965 4,483 1,176 Operating Cash Flow

26,832 37,292 36,202

Fixed Capital Expenditure

(24,089) (24,139) (25,858) Other income

5,883 6,253 6,896

Investing Cash Flow

(13,098) (17,135) (18,197)

Dividend Paid

(8,670) (9,180) (9,180) Financing Cash flow

(8,578) (18,226) (9,157)

Opening Cash

23,566 28,722 30,653 Net Change in Cash

5,156 1,931 8,849

Ending Cash 28,722 30,653 39,502

14


Disclaimer and related information

Analyst certification

The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subject companies and their securities, and no part of the analysts’ compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Disclosures and disclaimer

This document has been prepared by investment analyst at Arif Habib Limited (AHL). AHL investment analysts occasionally provide research input to the company’s Corporate Finance and Advisory Department.

This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to current and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities.

The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries.

Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.

We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information and opinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the securities that the analyst covers.

© 2010 Arif Habib Limited, Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and National Commodity Exchange Limited. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.

15


Contact information

Equities Research Email Telephone

Faisal Khan

Shahbaz Ashraf

Syed Abid Ali

Saad Khan

Usman Saeed

Khurram Kamal

Deputy Head of Research

Research Analyst

Research Analyst

Research Analyst

Research Analyst

Database Officer

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

+92-21-3246-2589

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext: 248

+92-2132460717-19 Ext : 211

International sales Email Telephone

Mohammed Imran Head of International sales [email protected] +92-21-3246-2596

Domestic sales Email Telephone

Sajid Q. A. Bhanji

M. Yousuf Ahmed

Farhan Mansoori

Syed Farhan Karim

Afshan Aamir

Furqan Aslam

Vice President and Director

Senior Vice President

Vice President

Vice President

Vice President

AVP

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[email protected]

[email protected]

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[email protected]

[email protected]

+92-21-3244-6254

+92-21-3242-7050

+92-21-3247--3268

+92-21-3244-6255

+92-21-3244-6256

+92-21-3244-6256

Corporate finance and advisory Email Telephone

M. Rafique Bhundi

Kashif Suhail

Saifuddin Shamsi

Vice President

Vice President

Senior Analyst

[email protected]

[email protected]

[email protected]

+92-21-3240-1931

+92-21-32046-2597

Ext : 253

IT email Telephone

Salman Haider Head of IT [email protected] Ext: 233

Management email Telephone

Bilal A Moti CEO [email protected] +92-21-32460717-9

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