Equity Analysis /

Grameenphone: Q2 19: Temporary dividend cut on restated earnings

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    IDLC Securities
    16 July 2019
    Published by

    EPS of BDT7.07 meets our expectation. Normalised earnings of Grameenphone (GP) during Q2 19 demonstrated c25% yoy growth driven by c11% yoy voice revenue growth, c18% yoy data revenue growth and c288 bps yoy improvement in EBITDA margin. However, the reported earnings showed c8% yoy decline as the Q2 18 earnings incorporated a one-off tax gain equivalent to BDT1.96 per share.

    However, the dividend payout was well below expectations as GP restated earnings to reconcile accounting error. GP omitted a few non-deductible expenses, which deviated from IAS 8. The reconciliation revised down retained earnings by BDT5.5bn, including BDT1.8bn adjustment for 2018 earnings (c5% of 2018 earnings). Therefore, GP cut its interim dividend per share from BDT12.5 in 2018 (c103% payout) to BDT9.0 in 2019 (c67% payout), which is significantly below our interim dividend expectation of BDT12.0. We expect 2019 dividend payout to be below 90% compared with 108% in 2018.

    Revenue growth beat our expectation by 3%, but strong headwind ahead. Voice revenue generated c11% yoy growth driven by c9% yoy subscriber growth and c1% yoy growth in Average Revenue Per User (ARPU). Also, c13% yoy increase in Average Price Per Minute (APPM) boosted EBITDA margin by 288bps yoy.

    However, the regulation regarding tower sharing guideline poses a challenge to the organic growth of the voice revenue. Being restricted by the Bangladesh Telecommunication Regulatory Commission (BTRC), GP rolled out only 210 2G sites so far in 2019. The number falls well below our expectations of 700-750 sites, which are necessary to meet our 2019f voice revenue expectations. Since GP cannot extend its 2G network further without partnering with the tower companies, we think the network quality will suffer. Therefore, we think that voice revenue will underperform our initial expectation in H2 19, especially in Q3. Also, we think the ongoing bandwidth restriction is likely to continue for 30 days in total before it is withdrawn, therefore lowering our earlier data revenue estimates. In sum, we reduce our 2019f revenue estimation by BDT4.6bn (3.1% revision), considering the downward adjustment for voice and data revenue, albeit partially offset by surprising growth in Value Added Service (VAS). We expect a more amicable regulatory environment from Q4 19 and therefore expect a minimum impact in our 2020 forecasts.

    Reiterate Buy with an updated TP of BDT438.8. The reduction in 2019f revenue lowers 2019f EBITDA expectation by 3.0%, NPAT expectation by 4.4%, and TP by 0.4%. We also revise down our dividend expectation to BDT23.0 (from BDT 26.2) per share. Despite the revision, GP stock offers c41% ETR.

    We note that our TP estimation already includes a 36% payoff for the contingent liability claim. The worst-case scenario for GP would be paying off the contingent liability claim completely. If we incorporate the complete payoff for the contingent liability (BDT126bn), our fair-value estimate would stand at BDT379/share, compared with the market price of BDT328/share, offering c23% return potential. Therefore, we believe the impact of the contingent liability claim is priced in and, hence, reiterate our Buy recommendation.