Updated on Nov 22, 1999
With the passing of yet another week, the KSE 100 continued to
inch its way upwards. Over the week the KSE 100 climbed by another 2.21% to close the week
at 1204.3, breaking the 1200 psychological barrier in the process. Fuelling the bullish
sentiments were two core reasons.
1. Greater then expected PTCL FY 99 announcement.
2. The announcement of the initiation of arresting corrupt defaulters.
With PTCL commanding the heaviest weightage in the KSE 100, any sort of
news emanating from Islamabad is viewed with great caution as the repercussion on the
market is felt immediately. With PTCL announcing better then anticipated results, the KSE
100 was able to further consolidate on its positive sentiments developed after the
successful implementation of the military of arresting the loan defaulters after the
expiry of the 17th November deadline for repayment.
The absence of the foreign investors remains a poignant reminder of the
lack of consistency in government policies. With the announcement of the government
removing the capital control imposed on making foreign currency payments via credit cards,
these measures would be a welcome development for both the local and international
Another positive development came in the shape of the 10% reduction in
power charges for the agricultural consumers. With the government now once again
intervening in the cotton market, any measure to subside any cost of production for the
cotton producers would be very positive for the whole textile sector, especially for the
export based units, namely Nishat Mills as they would be able to compete in the
international market by offering competitive prices.
For the coming week, the KSE 100 is likely to witness initial
resistance around the 1250 levels. Major concentration is going to remain around the
1250-1300 levels, while bottom line support will likely emanate around the 1165 levels.
Going forward, with the government's drive to pursue the loan defaulters likely to shift
gears in the next fortnight, with the scope of the action increasing the KSE 100 is likely
to remain restricted between the current levels as mentioned above.
PTCL: FY 00 earnings outlook improved
Against our EPS forecast of Rs. 3.35, Pakistan Telecom released
its FY 99 earnings disclosing an EPS of Rs. 3.44, 2.7% above our expectations. Earnings
grew by 20.6%. On comparison vis-a-vis the region we continue to believe that Pakistan
Telecom trades at an unjustifiable discount and we reiterate our Buy
The company has also declared a Rs 2 per share dividend placing
the shares holding period yield at 10.05%. Book closure date of December 21st puts
annualized yield at 134%.
There is a significant liquidity overhang in the stock, which may
trigger selling over the next 3 6 months. Price upside should therefore remain
capped over this period allowing attractive entry levels.
The most positive aspect of these results is that despite including
provisions for obsolete stock of equipment, earnings growth has been strong. We still need
to ascertain the amount of this provision and whether it has been a one off item. In case
it has been one off, FY 00 consensus forecasts are likely to be revised upwards resulting
in a reduced expected earnings decline.
Operating margins were up 2.5%, which is understandable given that FY
98 operating costs included certain one off items, which were a net addition to cost.
Revenue growth has slowed down following a lackluster line expansion a continuing decline
in average settlement rates (ISR). The financial position of the enterprise has improved
with interest cover moving up to 4.7, by 1.5 points. Taxation is for the group as a whole
and PTCL's operations will be liable to corporate tax in FY 00.
The decline in average ISR is close to our estimate of 20%, resulting
in the actual amount showing a positive variance of 0.9%. Going forward we anticipate a 20
24% decline in ISR till end 2002 resulting in CAGR for incoming revenues of (7)%.
Whereas we expect call minute growth of 12%, actual growth amounted to 14.6%. Having
underestimated positive elasticities resulting from declining ISR we will be raising our
international incoming revenues.
The decline in international outgoing revenues should not come as a
surprise given that domestic outgoing rates are being maintained at high levels to reduce
settlement payments as these are based in foreign currency. Over the next 3 years, we
expect 5.5% CAGR from this revenue stream. Given the slight decline in outgoing revenues
over FY 99, we will be lowering our forecasts. On the domestic front, the 15% reduction in
NWD rates yielded strong results with overall revenues up by 16.1%. Time metering on local
calls resulted in revenue gains of 13.5%, though our expectations were high which will be
lowered. Finally, increase in line rent resulted in a 20% gain in this category.
What is disappointing is lack of effort from PTCL to raise its Internet
subscriber base, which is extremely low at 11,000, given an expected market size in the
region of 70,000. PTCL's monopoly status and its ownership of the only fixed line telecom
network in Pakistan, it holds a strong comparative advantage. This may be wasted,
resulting in a diminished value of the entity, unless efforts are mobilized to raise