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Pakistan Alpha (PTC & KOHC, Nov 11, 2021)

AKD - Pakistan Alpha     

PTC: Evolving business model to add value

• Our liking for PTC emanates from i) expanding FTTH network with ever increasing subscriber base, ii) improving market for Charji amid increase in adoption of online platforms for e-commerce, edutech, and travelling to remote areas (tourism) etc., iii) Ufone has been awarded 4G Spectrum License in Sep’21 where Ufone has secured the means to finance its acquisition and rollout of 4G services all over Pakistan, apart from this, Ufone has also renewed and acquired its Azad Kashmir and Gilgit & Baltistan spectrum and iv) Ubank continue to carry its upward momentum by growing its funding book to PkR70bn. We expect PTC and PTC group to continue the same trajectory of topline growth with FY21-24F CAGR of 8%, similar to a growth experienced in 9MCY21 where all the segments across the value chain contributed in growth (+12.7/13.7/4.7% in broadband and IPTV/corporate and wholesale/cellular and wireless services). 
• PTC earnings continue to carry upward momentum, with the company posting an unconsolidated NPAT of PkR5.7bn (EPS: PkR1.11) in 9MCY21 vs. NPAT of PkR4.1bn (EPS: PkR0.80) in the same period last year. Topline grew by 7.3% to PkR57.3bn in 9MCY21 with major growth coming from wireline data (+13%YoY) and corporate & wholesale segment (+10%YoY) while promising wireless data showed growth of +12%YoY in the same period. Earnings outlook for the company remain robust with PTC targeting to expand its broadband services all over the country which currently stretches to 50,000KM while Ufone’s 4G rollouts are expected to increase subscriber base even further (+30%YoY in 3QCY21).     
• Moreover, recently announced pilot project of blended e-learning between the Federal Directorate of Education and PTCL adds further robustness to an already strong future outlook of the company where PTC’s flagship contract with Huawei Technologies Pakistan in revolutionizing IP Edge and Optical Transport Network (OTN) would further Cement PTCL’s positioning as a provider of high speed data services. Currently, Pakistan is undergoing a technological shift, where increasing sense of digitalization coupled with heavy dependence on high speed internet should keep PTC’s online channels intact. Moreover, the company is actively developing strategic partnership in Software-as-a-Service (SaaS) segment in the banking, education, cloud and cyber-security vertical. Furthermore, PTC also locked in contract of hosting UBL’s primary site at PTCL’s purpose-built Tier -3 certified Data Centre facility in Karachi, extension and upgradation of internet services of utility stores, and pilot run project of E-Education system for government schools. We expect PTC to announce full year earnings of PkR1.6/sh, therefore the current PER stands at only 6.5x. PTC has recently started offering many value added services in Pakistan in collaboration with its international partners. As PTC makes inroads into local market with its value added services, we may not only see profitability growing in the coming year but scrip rerating to a higher multiple.

KOHC: Trading at heavily discounted multiples!

• Kohat Cement Company (KOHC) remains one of the best plays to capitalize on the upcoming margin enhancement of the cement sector with the company being relatively more sensitive to coal prices compared to peers while on the other hand, it is also moving forward with capacity expansion of 2.3mn tons, which will take total capacity of KOHC to 7.2mn tons by FY24.
• Coal prices have been on upsurge (increasing by 67% since Dec’20) and registered an all-time high of USD238/ton during Oct’21 as global energy crunch led to an increase in demand for coal-based power generation. However, prices have lately receded to USD145/ton as China placed price controls locally while also asked local miners to scale up production. On other hand, after initially being unable to pass on the impact due to increased oversight by authorities, cement players have lately increased prices by PkR50-60/bag to ~PkR710/bag during last 1-2 months, in a bid to pass-on the impact. Even though KOHC’s margins are expected to contract during next two quarters on the back of high fuel cost, all the signs indicate towards coal prices declining post winter as power demand decreases in developed economies while coal production is also expected to increase, leading to increase in cement sector’s profitability. KOHC, in this scenario, will be one of the prime beneficiaries with the company being one of relatively sensitive players to change in coal prices.
• Additionally, KOHC is expanding its capacity by 2.3mn tons, expected to come online in FY24. The expansion costing PkR25bn is expected to take company’s market share to 10.3% from 9.1% currently with the company increasing capacity by 49% against rest of the industry expanding by 22% (~14mn tons).  Moreover, company continues to trade at discounted EV/EBITDA of ~3.5x compared ~6.2x of AKD cement universe (excluding LUCK and DGKC). Even though company has historically traded at a discount, even incorporating a 20% discount to current EV/EBITDA of our sample group, we arrive at target EV/EBITDA of 4.9x, which results in a TP of PkR275/sh for the stock – 42% upside. 

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