Equity Analysis /

Grameenphone: Impact of contingent liability priced in; reiterate Buy on valuation

    Tracy Kivunyu
    Tracy Kivunyu

    Equity Research Analyst, Telecoms

    IDLC Securities
    20 May 2019
    Published byIDLC Securities

    Regulator’s audit claim of BDT126bn (US$1.5bn) raises concern, but we think the impact is priced in. The Bangladesh Telecommunication Regulatory Commission’s (BTRC) audit claim remains the most pressing issue for Grameenphone (GP) as it amounts to 86% 2019f revenue and 3.4x 2019f earnings. However, our base case scenario (TP 440.5, ETR 35.1%) includes a 36% payment for contingent liability (BDT33/share). Even with a full booking of the BDT126bn claim in our numbers, we still expect 10.3% ETR in the stock with a fair value estimate of BDT381.

    Reiterate Buy with a new TP of BDT440.5 (previously BDT451.75) to reflect the impact of stronger voice revenue and EBITDA margin assumptions (+BDT22), offset by a 36% payoff for the BTRC audit
     (-BDT33) resulting in a net revision of -BDT11. Our TP for December 2019 implies 16.0x 2019f PE, 7.1x 2019f EV/EBITDA and 4.4x 2019f EV/Sales. GP trades at 12.4x trailing PE, a 20% discount to FM and EM peer median. 

    Real penetration is still low, but we expect growth in subscriber base. The real SIM penetration rate of Bangladesh (57%) appears impressive compared with Vietnam (49%) and India (53%), but still offers untapped growth potential when benchmarked against Philippines (63%), Indonesia (73%) and China (82%). The bigger opportunity lies in data, with a real penetration rate of 21% compared with India (29%), Indonesia (39%) and China (54%). We expect 3.4% and 12.6% CAGR in voice and data subscribers, respectively during 2019-23, attributable to 3.7% CAGR growth in adult population and higher smartphone adoption amid falling device prices.

    Significant competition in data, but we expect slowdown in price cuts. GP faces tough competition in the data segment due to aggressive price wars by Robi and Banglalink. The average price per gigabyte (APPGB) has declined 56% to BDT45 from BDT101 over the past eight quarters. With data prices significantly lower, competitors such as Robi will have to assess its ability for further price cuts amid profitability concerns. On the other hand, Banglalink may consider growth over profitability for now, but may find itself constrained by poor liquidity and low investment in network expansion. Therefore, we expect price cuts to slow in H2 19. We expect sustainable APPGB in Bangladesh to reach cBDT20 (USD0.52), considering the lower data price in India (USD0.25), unless there are regulatory interventions (such as data price floors). 

    SMP-mandated increase in voice tariff not significant. The BTRC instructed GP to increase its outgoing floor tariff to BDT0.50/min from BDT0.45/min, following the telco’s declaration as a significant market power (SMP) entity. If implemented, annual voice call expenses for an average customer will increase by 11% to BDT143 (US$1.7) per annum, which we think is not particularly onerous and thus we expect that the initial drop in minutes of usage will recover as customers adopt the new prices. The increase in interconnection costs to BDT0.19/min from BDT 0.14/min, on the other hand, is likely to reduce EPS (-BDT0.8, -2.9%), EBITDA margin (-140bps) and valuation (-BDT10, -2.2%). We do not incorporate the tariff impact as we await further information.

    Telenor-Axiata merger could be a solution for tower sharing. We are neutral about the operational implication of the tower sharing guideline if the Telenor-Axiata merger takes place, as GP would benefit from it via synergies with Edotco. Without the merger, GP’s competitive advantage in network quality may be compromised. Moreover, the guideline will require GP to forgo revenue from tower lease and therefore will discontinue it from 2020.

    Banglalink acquisition by Reliance Jio – a change in the competitive landscape? Though unconfirmed, we cannot rule out the possibility since both Banglalink and Global Telecom Holdings (GTH) struggle with liquidity and the Bangladesh macro story offers potential. However, uniform voice call rate, regulatory restriction to construct fibre cables by telcos, tower sharing guidelines and high interconnection costs offer significant barriers to implement Jio’s aggressive strategy. Should the merger happen and Reliance Jio replicate its aggressive strategy in Bangladesh, we expect significant ARPU decline and profit erosion amid price pressure (scenario analysis Table 7, page 13). 

    Risks to our recommendationThe biggest downside risks to our recommendation are regulatory risks, which often arrive suddenly. We are particularly concerned about the following SMP regulations: asymmetric mobile termination rates, cross-subsidies, spectrum pricing, social obligation fund, revenue sharing and tariff-related issues.

    This Bangladesh Telecom update is a joint report from Tellimer Capital and its research partner in Bangladesh, IDLC Securities, as we bring together our coverage. This report discontinues Tellimer’s independent coverage of GRAM. The changes in forecasts and ratings cited are changes from Tellimer’s previous forecasts and ratings.