The regulator has relaxed its stance in the wake of Covid-19
The Cabinet Division and the Ministry of Public Administration asked the telecom operators to make services available throughout the Covid-19 outbreak. To ensure the uninterrupted telecom service, the regulatory bodies became more cooperative. The tension between Grameenphone (GP) and Bangladesh Telecommunication Regulatory Commission (BTRC), caused by the ongoing audit dispute, eased up after the Court gave written order to the regulator not to interrupt GP’s operational activities. The written order, issued recently, also directed GP to pay the second instalment of BDT10bn (USD117.6mn) by the end of May 2020.
BTRC also allotted 7mn recycled numbers for GP customers. Please note that GP exhausted the majority of its allocated SIM numbers in mid-February and decelerated customer acquisition as the regulator denied to issue new numbers to all telecom operators. As a result, GP lost c0.6mn active subscribers base in February 2020.
Also, there has been significant development with Bangladesh Bank (the central bank) regarding the remittance of dividend to Telenor. Earlier the central bank did not issue regulatory approval to remit any dividend to Telenor, the 55.8% owner of the company, due to confusion over in-kind issuance of a few shares. After several discussions, Bangladesh Bank allowed GP to repatriate the majority of the dividend to Telenor except for the amount belonging to those few shares.
We may see a surge in data usage during the outbreak
The data offers promising growth during the outbreak for two reasons – first, a part of the service workforce started working from home and second, people to spend more time in social media during the leisure of the lockdown. Also, the increased social media usage to celebrate the birth centennial of Bangabandhu Sheikh Mujibur Rahman is likely to offer 1Q 20 data usage a boost.
The voice calls, on the other hand, may have a mixed impact. On the news of the first corona patient (8th March 2020), GP experienced a surge in voice minutes as the concerned citizens started checking on their near ones. We may see more of this ‘corona minutes’ during the outbreak. However, the overall slowdown in the business environment, especially in small and medium enterprises, is likely to result in a drop in business calls, thus offsetting the benefit from the social calls.
But there may be low subscriber growth and some supply chain bottlenecks
The increase in SIM tax in June 2019 budget slowed down data subscriber growth, especially in 4Q 2019 which demonstrated no growth in data subscriber on a qoq basis. On top of that, the lack of new SIM numbers has already decelerated customer acquisition in 1Q 20. The outbreak is likely to put further pressure on subscriber growth. Therefore, we assumed 2.6% growth in voice subscriber base and 5.3% growth in data subscriber base in 2020 compared to 5.1% and 9.4% respectively in 2019. Overall, our 2020 assumption includes 1.5% increase in voice revenue driven by lower average revenue per user (ARPU) and 15.9% growth in data revenue driven by 32.7% growth in average megabyte per user (AMBPU).
Despite the cooperation from the authority, there may be a limitation to invest in network expansion during the outbreak. Therefore, we expect a low level of capex in 1H 2020 and resume in expansion when the pandemic is controlled.
We reiterate Buy with updated TP of BDT420.0 (ETR 80.0%)
We updated our assumptions based on the recent events and 2019 reported figures and trimmed 2020f revenue (-2.6%), earnings (-4.9%) and TP (-4.3%, from BDT438.8 to BDT420.0). Our current TP implies 15.1x 2020f PE (c9% 5Y earnings CAGR), 6.6x 2020f EV/EBITDA and 4.1x 2020f EV/Sales compared to 9.3x LTM PE, 3.5x LTM EV/EBITDA and 2.2x LTM EV/Sales.
Please note that GP believes the payment of BDT20bn (BDT14.8/share) to the court to be adjustable with the final audit claim settlement and therefore may not keep any provision in its 2020 financial statements. Rather the whole amount may be treated as a receivable (not an expense) for accounting purposes. The choices in accounting practice do not change our cash flow estimations and dividend expectations since they are already adjusted for the payment. However, some income statement and balance sheet items need to be adjusted should GP require to make provision for the payment. In such case, 2020f EPS is likely to be BDT13.1 and 2020f retained earnings is likely to be BDT15.8bn instead of BDT27.9 and BDT35.8bn respectively. Please also note that our TP of BDT 420.0 remains unchanged regardless of the accounting practices since it already assumes a 36% payoff (equivalent to BDT44.6bn, USD524.1mn, BDT33.0/share) for the contingent liability claim, deducted directly from the estimated EV.
The worst-case scenario for GP could be paying off the contingent liability claim completely. If we incorporate the complete payoff for the contingent liability (BDT126bn, USD1.5bn, BDT93.0/share), our fair-value estimate would stand at BDT360/share against the market price of BDT238.8/share, thus offering c51% return potential. Therefore, we believe that the impact of the contingent liability claim is priced in and, hence, reiterate our Buy recommendation.