Earnings Report /

Grameenphone: Q1 20 – Data growth and margin expansion lead to 26% yoy earnings growth

  • EPS BDT7.92 (vs BDT6.29 in Q1 19) surpassed expectations by 8.5%; contribution from strong data growth (25% yoy)

  • Q2 20 outlook: Covid-19 holiday to lead to strong data growth, but 5-10% likely decline in voice revenue

  • We reiterate Buy with TP of BDT420.0 (ETR 80.0%)

IDLC Securities
23 April 2020
Published byIDLC Securities

EPS BDT 7.92 (vs BDT 6.29 in 1Q 2019) surpassed expectations by 8.5%. Data revenue growth by c25% yoy, 73bps yoy EBITDA margin expansion, BDT802mn one-off foreign exchange gain due to 16% YTD Norwegian krona (NOK) depreciation, and low effective tax rate (38%) generated BDT10.6bn profit in 1Q 2020. If we adjust for the one-off currency gain and low tax rate, the profit would stand at BDT9.6bn (EPS 7.3), which is similar to our expectations.

Contribution from strong data growth slightly tainted by the decline in voice revenue. Data revenue in 1Q 2020 stood at BDT8.5bn (+25% yoy) driven by c18% yoy growth in average data revenue per user (data ARPU). During the quarter, average megabyte per user (AMBPU) increased by c57% to 2,225 MB. However, due to competitive pressure and a price cut, the average price per gigabyte came down to BDT32 (-26% yoy). However, the strong contribution from data was marginally offset by the decline in voice revenue by BDT0.5bn (-2% yoy). The main reason is that Grameenphone (GP) lost 1.1mn subscribers during the quarter due to the usual churn rate but could not acquire new subscribers as the company exhausted new SIM numbers. We think that without such bottleneck there would have been no decline in the voice revenue. Please note that the problem got solved in mid-March as the regulator allowed GP to recycle 7.9mn numbers.

Covid-19 a boon for data, but bane for voice. The government declared a general holiday for Covid-19, starting from March 25 to May 5 and may extend the holiday if required. We expect strong data growth during the holiday due to the high usage of video-conferencing applications, social media, and streaming platform. Nevertheless, slow economic activity, low customer acquisition, and high churn rate will reduce call volume, suggesting 10-15% decline in voice revenue during the holiday period. We expect the economic activities to resume gradually from June 2020 along with recovery in voice revenue. Therefore, our 2Q 2020 expectation is 5-10% yoy voice-revenue decline, which the growth from data revenue will not be able to offset completely. We incorporated this assumption in our 2020 forecasts. We expect BDT148.0bn revenue (+3% yoy) and BDT37.6bn profit (EPS BDT27.9, +9% yoy) in 2020.

Operating efficiency improved EBITDA margin by 73bps yoy. EBITDA margin stood at 63.3% in 1Q 2020 vs 62.5% in 1Q 2019. Most of the contribution came from the decline in salary expenses, and operation & maintenance costs.

The regulators have been cooperating amid Covid-19 crisis, as we mentioned earlier. The Bangladesh Telecommunication Regulatory Commission (BTRC) started issuing no-objection certificate (NOC) from mid-March after GP deposited the first instalment of BDT10bn. Therefore, GP spent only BDT0.4bn as capex for network improvement during 1Q 2020. We believe the capex will increase during the post-holiday period when BTRC office resumes and provides GP with all necessary NOCs. Meanwhile, the main litigation on the BTRC Audit is pending at the lower court. The next date in the court is scheduled on the 21st July 2020.

We reiterate Buy with TP of BDT420.0 (ETR 80.0%). Our TP implies 15.1x 2020f PE (c9% 5Y earnings CAGR), 6.6x 2020f EV/EBITDA and 4.2x 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 (USD235.3mn, BDT14.8/share) to the court is adjustable with the final audit claim settlement and therefore plans not to keep any provision in its 2020 income statement. So, the payment of BDT10bn (first half of the total) was not provisioned in the 1Q 2020 income statement. Rather the whole amount was treated as a non-current asset in the balance sheet for accounting purposes.

The choices in accounting practice do not change our cash flow estimations and dividend expectations since we adjusted these figures for the payment. However, some income statement and balance sheet items need to be adjusted should GP require making 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 BDT35.7bn 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.