ufoneadRecent news about decline in profit of PTCL has concerned many investors and shareholders. Will Ufone, mobile phone arm of PTCL, be able to fight back and reverse this trend? In this post I present a snapshot of Ufone. I’ll discuss its strengths, weaknesses, threats to its current position and its future prospects.

Conclusion:Lots of potential if Ufone and its parent get its act together and execute well on their expansion and competitive plan. Read on to understand the basis for this conclusion.

 About Ufone

Ufone (official name: PTML)  is a PTCL company and Etisalat of UAE owns 26% of PTCL. For more information about Etisalat I recommend reading this investment report from Shuaa. This report also includes details of how PTCL was privatised earlier this year in April. Please note: PTCL does not report detailed earnings results for Ufone. Therefore we need to look at PTCL results as a whole.

Highlights of Recent Earning Report

The annual 2005-2006 and first quarter 2006-2007 financial reports are available at ptcl website.

For the first quarter 2006-07 ending Ocotber 30, 2006 the profit before tax was Rs.7.7 billion with net Profit of Rs.5.1 billion, which is 7% lower than that of the corresponding quarter of last year. For the full year 2005-06 after tax profit was Rs 20.78 billion which was 22% less than previous year’s profit.
Dividend of Rs 3 per share was awarded which corresponds to an impressive dividend yield of 12.3% !

PTML (Ufone) – a wholly-owned subsidiary has improved its financial performance compared to the first quarter of last year.  It added over 1.37 million new subscribers during July to September 2006 quarter, making its total subscriber base in excess of 7.52 million as of end September 2006. Ufone earned a net profit of Rs.666 million compared to Rs.389 million recorded for the same period last year.

Ufone Huawei Mega dealNetwork and infrastructure expansion was carried out in 2006 progress and more is being planned to deploy WLL, Wimax etc. In the largest network expansion deal of Pakistan, PTCL signed up Huawei for a US$550 milliondeal which will allow Ufone to double its capacity. Financial reporting standards have also been improved. Details are in the directors report at PTCL website. Note that analysts expect Ufone to be an increasingly major contributor to PTCL earnings. This indicates the growth in wireless sector and the competition in fixed-line and other sectors.

Weaknesses and Threats

* Increased Competition from new investors (Mobile firms such as Telenor, WLL operators)
* Poor service (see more on service quality and PTA interjections below)
* Network capacity and quality
* Management Style and approach

How to Invest

Through Pakistan mutual fund companies such as Abamco who offer funds with PTCL as holdings. For example: UTP-ISF fund has about 10% PTCL stock. You can buy stock directly as well but the Pakistan stock market is not without its risk. In 2005 the Pakistan stock market crashed amid rumours of scandals which are now under investigation (see this article from DAWN, read more here and take a look at the website of Securities and Exchange Commission of Pakistan).

Here is a professional report (by Imtiaz Gadar – Merril Lynch, see the full pdf here which is from Sep 2006) about Ufone and PTCL (refrerred to as PakTel):

“Having traded down materially during 1H06, PakTel now offers an attractive yield and substantial upside to our DCF valuation of Rs60. PakTel is marked down for its low earnings growth outlook from increasing wage costs and fixed line deregulation.

High yield may not be sustainable if new strategic shareholder (Etisalat) decides to invest more heavily in wireless. Earnings transparency is below average as mobile earnings are not disclosed to the market. Main positives are potential for long term cost cutting, and good secular growth prospects in
Wireless and internet given low teledensity (3.5%) and high GDP growth (7%).

Clear direction from new owners, management stability and dividend payout certainty are needed to reignite positive momentum. Valuation score have improved with the continued slide in share price and we now rate the stock a Buy.”

For more about Quality Of Service Issues at Ufone

Pakistan Telecommunication Authority (PTA) has announced that it will conduct a countrywide Quality of Service (QoS) survey of all cellular mobile operators in the next two to three months to determine the service quality being offered by mobile operators in the wake of consumer complaints against their service. The Authority has taken strong exception to the problems being faced by cellphone users in the shape of severe congestion, call connection errors, frequent call drops and excessive and unjustified billing due to false messaging.

In April 2005 PTA had issued a show-cause notice to Ufone for providing low quality service and initiated proceedings against it. The PTA said on Monday that the notice to the Ufone was served on the basis of the results of the quality of service (QoS) conducted recently. The PTA has given 30 days to the operator to submit the reply. The proceedings may lead towards the appointment of an administrator or levy of fine up to Rs 350 million, and it can be suspension or termination of licence under section 23 of Pakistan Telecom (Re-organisation) Act 1996.

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