Karachi: Grey traffic has been a major menace for Long Distance and International (LDI) operators in Pakistan.
According to AKD Securities, the menace of grey traffic coupled with stiff competition amongst the Telco’s has resulted in LDI industry revenue to fall sharply from its FY09 high of PkR48bn to just PkR30bn by FY11. Options are being considered to counter grey trafficking and in turn enhance both the government revenue and flagging LDI sector revenues, where one such option is to form an International Clearing House (ICH), details of which are presented below.
The proposed mechanics of ICH: According to Competition Commission of Pakistan (CCP) hearing on Jan 31 2012, the ICH agreement would entail the LDI operators in Pakistan to assign their rights granted by PTA (Pakistan Telecom Authority) to terminate all the incoming international traffic to the PlC network. In turn, PTC would sell its call terminating services to foreign carriers at the Approved Settlement Rates (ASR) of the PTA, while each LDI operator would get a pre-determined fixed quota from PTC to terminate call on its network and furthermore receive a fixed share in revenues generated from all incoming traffic. However, the proposed mechanism was opposed by Transworld Associates (TWL), which owns and operates an undersea fiber optic cable system, where TWL is a competitor of PTC views the ICH would provide PTC monopoly over all int’l incoming traffic. Any resolution of the said agreement could be a game changer for the telecom industry, including PTC.
Benefits of ICH: The proposed ICH Agreement would have multiple benefits including i) control of grey traffic, which as per some estimates accounts for -20%-30% of int’l traffic, ii) enhancing of government revenues, iii) improving the viability of telecom companies in Pakistan, which in turn will enhance the attractiveness of 3G license auctions for investors and iv) effective elimination of competition amongst the LDI operators, as post ICH a fixed ASR (PTA approved) would be charged on all incoming traffic compared to the present scenario where operators have aggressively slashed rates in order to under-cut competition. Recall, that the last approved ASR rates by PTA were USc6.25/min, however the realized ASR is currently only ~USc1.5/mm.
LDI operator’s 1HFY12 performance review: According to PTA’s Dec’11 quarterly report, total incoming international traffic amounted to 3.9bn minutes in 2QFY12 or ~1.3bn minutes per month. Despite the 42%YoY increase in international traffic (both incoming and outgoing) during 1HFY12, total LDI revenues actually fell by 5%YoYto PkR15.9bn translating into an effective ASR of just- USc1.7/mm in 1HFY12 compared with USc3.5/min last year. While latest market share of LDI incoming minutes are not available, PTC is thought to account for the bulk of the incoming traffic (-50%) with the remaining share being distributed amongst the remaining 13 LDI operators, of which the listed operators include World Call, Wateen and Telecard.
What do the numbers say? Assuming average monthly incoming traffic of 1.0bn minutes (12bn minutes per annum), a USc1/minute improvement in ASR would result in incremental revenues for LDI operators of PkR10.9bn. PTC being the incumbent operator would be the biggest aggregate gainer, where assuming 50% market share for PTC, would translate into incremental annualized revenue of PkR5.5bn for PTC (EPS impact of PkR0.70). AKD Securities believes that the net improvement in ASR rates would likely range between USc3-4/minute, which in4urn would translate into a huge revenue impact of PKR16.4bn -PkR21.8bn (EPS impact of PkR2.10-PkR2.80) for PTC, warranting a significant multiple rerating of the scrip. AKD Securities flags other listed LDI operators namely World Call (WTL), WATEEN (WTCL) and TELECARD (TELE) as key beneficiaries of the ICH mechanism, whereby the incremental revenues would likely be distributed according to the remaining LDI operator’s existing market shares or subsequently could be divided equally as per the license. While PTA’s Dec’11 report does not have the breakup of the latest market shares of new LDI’s (LDI’s ex-PTC), taking the available market shares (as of Dec’09) AKD Securities has estimated the EPS impact for the three listed LDIs, where WTL had the highest share (21% of new LDI revenues) followed by WTCL (17%) and TELE (8%). AKD Securities believes that share of TELE would have further dropped from the Dec’09 levels as their revenues have been on a steep decline, while the remaining two (WTL and WTCL) would have likely declined/maintained given the stif competition amongst existing LDI operations and rising penetration of grey traffic.
Telecom sector: EPS sensitivity to ASR
|Increase in ASR USc/min||1.00||2.00||3.00||4.00|
|a.) Incremental revenue (PkR bn)@12bn min pa||10.92||21.84||32.76||43.68|
|b.) PTCs revenue share @50%||5.46||10.92||16.38||21.84|
|c.) Other LDI revenues (a-b)||5.46||10.92||16.38||21.84|
|d.) Per operator share (c/13) – PkRbn||0.42||0.84||1.26||1.68|
|EPS impact listed telco’s|
|I – Based on equal revenue share|
|II – Based on market share as of Dec’09|
|Source: AKD Research|
Recommendation: AKD Securities believes that the proposed ICH mechanism would be a game changer for the telecom industry, warranting a multiple upgrade for the sector. While AKD Securities already are Overweight on PTC (Target Price of PkR18.5 offering 37% upside from current levels), the proposed mechanism has the potential to nearly double PTCs earnings. Furthermore, other listed players would also witness substantial improvement in earnings, where all three of the remaining telcos (WTL, WTCL and TELE) are already trading at distressed prices.