8/7/2019 BMAWateen

1/2

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, PakistanFor further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the informationcontained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon assuch. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, orsolicitation of any offer to buy or sell the securities mentioned.

Equity Research Pakistan

Thursday, December 23, 2010

1

In FocusFixed Line Telecommunication

Stock Statistics

Ticker WTCL

Mkt Cap USD mn 27

6M ADT mn shares 0.3

Shares Outstanding mn 617

Stock Performance

1M 3M 12M

Absolute % -0.8 -6.7 -40.9

Relative to KSE % -8.8 -25.3 -63.6

Wateen Analyst Briefing Takeaways WTCL is expected to reflect injection of PKR3.9bn (~USD45mn) by the

parent group by Dec10; this includes sale of dues from Africanoperations to a related party for cash consideration

The company is to use proceeds from the IPO (PKR2.0bn) and injectionby the parent to reduce its leverage

Although this is likely to reduce financial charges in the short tomedium term, grey telephony is likely to persist and thus LDI businessprofitability will remain a concern

USF subsidy disbursement is likely to be recieved on a normalizedmechanism despite delays encountered earlier

The stock currently trades at PBV multiple of 0.6x compared to its peerPTC 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 ofthe company

Since its IPO at PKR10.0/share, Wateen Telecom (WTCL) has significantlyunderperformed the market with its current market value of share standing atPKR3.75/share.

To allay investor concerns regarding profitability, leverage, liquidity and businessrisks, the company conducted an analyst briefing yesterday (December 22, 2010).

Abu-Dhabi Groups Helping hand: PKR3.9bn Injection

One of the prime concerns for the company has been its rising leverage andreducing ability to fund its liabilities. The company closed its FY10 and 1QFY11with PKR12.5bn debt settled into current portion of long term financing owing to itsinability to make payments to lenders. The company has been under negotiationswith the parent Abu-Dhabi Group recently whereby the groups injection ofPKR3.9bn (USD45mn) to WTCL is likely to be reflected in Dec10 accounts. Thiscoupled 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 inthe short run.

Injection of PKR3.9bn includes, in part, settlement of dues from African based

related parties which is to be sold to a group company in India for cashconsideration. As of FY10 end, dues from African operations stood at PKR1.1bnand the same is to be treated as equity injection.

USF and Grey Telephony: Rewards and Risks still on the cards

WTCL has been awarded PKR2.8bn in USF subsidy for network/coverageexpansion. The management highlighted that the subsidy was delayed owing tofloods which ravaged though the country during most part of 1QFY11. However,due to significant improvement in terrain in the post flood scenario as well as

WTCLCurrent Price: PKR 3.5

Omar Rafiq omar.rafiq@bmacapital.com

Price and Volume Graph

0.0

1.0

2.0

3.0

4.0

5.06.0

2.0

3.0

4.0

5.0

6.0

7.08.0

M a y - 1

0

J u n - 1

0

J u l - 1 0

A u g - 1

0

S e p - 1

0

O c t - 1 0

N o v - 1

0

Volume mn(RHS) Price PKR(LHS)

40

55

70

85

100

115

130

May-10 Jul-10 Sep-10 Nov-10

KSE100 Index WTCL

WTCL vs KSE100 Relative Index Chart

8/7/2019 BMAWateen

2/2

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, PakistanFor further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the informationcontained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon assuch. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, orsolicitation of any offer to buy or sell the securities mentioned.

Equity Research Pakistan

Thursday, December 23, 2010

2

In FocusFixed Line Telecommunication

further resolved USF disbursement issues, it is expected that dues are likely to becleared on a much smoother basis.

With the issue of grey telephony, the management expressed its concerns astraffic continued to be routed through various undocumented mechanisms whichwas resulting in shortfall of revenue. Further, it was indicated that the issue isunlikely to be resolved in the short run to medium run and thus is one of the keyrisks to business profitability generated by the LDI segment.

Near term concerns persist, outlook improves on reduced leverageand new fiber rollout

Injection by parent, reducing leverage and expanding coverage all point in theright direction for the company. While this is likely to improve liquidity for thecompany, we believe that grey telephony and increased depreciation charges arelikely to be an investor concern in the short run. Moreover, roll out of new fiberprojects and materialization of USF subsidy is likely to help add to revenue base inthe medium to long term.

The stock currently trades at PBV multiple of 0.6x compared to its peer PakistanTelecommunication Company (PTC) which trades at 1.0x (40% discount to peervaluation). While the stock is not under active coverage, we will look to keep ourinvestors updated on the changing dynamics of the company.