Friday, August 31, 2012

ICH - Significant implications for the Telecom sector

Karachi Stock Exchange - Pakistan
Our channel checks suggest that the much touted International Clearing House (ICH) mechanism is very close to implementation. The only concerns at the moment are the objections raised by the Competition Commission of Pakistan (CCP), where we expect the Ministry of Information and Technology (MoIT) to amicably address the concerns of CCP. ICH will lead to the revival of the LDI sector in our view and should result in multiple rerating for the sector. While the market has today partially priced in the optimism from ICH as far as PTC is concerned (forward EPS could jump to PkR7.2 ex-VSS), we believe that the smaller telco players (TELE, WTL and WTCL) should also be in for a sustained bull run.

ICH key terms: In order to enhance the understanding of our readers, we have provided definitions/explanations of some of the telecom jargon (Source: Access Promotion Rules 2004):

i) Approved Settlement Rate (ASR): Half of the Approved Accounting Rate (AAR), which is the rate that a license negotiates with a foreign service provider for handling of one minute of international telephony.

ii) Access Promotion Charge (APC): Payments made by LDI licensees to LL (Local Loop) licensees or to the Universal Service Fund. It is the charge which an LDI operator pays to LL operator for termination of calls on the LL system. Recall that PTCL is the main LL operator in the country, so unlike other LDI’s, it will not have to pay APC, instead it will receive APC payments from other LDI operators.

The market dynamics: Total market size for incoming calls inclusive of the grey traffic is ~2bn minutes per month. Presently, the incoming traffic is mostly coming through legal channels owing to extremely low incoming rates. Post ICH we do see a significant fall in incoming traffic due to i) higher ASR will encourage grey traffic as well as shift towards VoIP platforms like SKYPE, ii) lower demand (demand elasticity), and iii) increase in outgoing traffic where currently outgoing traffic represents ~23% of total international traffic in Pakistan. Despite the said changes, we believe that incoming traffic through the legal channel should still average at around ~1bn min/month, where stricter monitoring, investment in infrastructure to prevent illegal traffic and need for greater voice quality should help curb grey minutes. VoIP is a concern for telcos globally and as per ‘TeleGeography’, VoIP accounted for ~30% of global international traffic.

Earnings impact: ICH will be a game changer for the listed telecom sector, particularly PTC, as the company will have 50% share in revenues from ICH, furthermore, unlike other LDI operators, PTC will actually receive APC and will not have to pay 15% of its LDI margin towards the settlement of USF dues. We estimate incremental per minute revenue of Usc7.5/min for PTC and Usc5.0/min for the other LDI operators. Post creation of ICH, the bargaining power of PTC would be enhanced as it will be the only LDI operator, making it easy for PTC to negotiate the higher ASR rates with foreign operators. Below we have provided earning sensitivity to incoming traffic, where assuming 1bn min/month, the incremental revenue of PTC will amount to PkR42.75bn, resulting in an annualized EPS impact of PkR5.45. The earnings sensitivity of the Telecom sector provided on the previous page assumes a market share of 50% for PTC, ~3.5% for WTL, ~6% for WTCL and ~3% for TELE. 

Recommendation: We highlight PTC as the major gainer from the ICH. Assuming recurring consolidated EPS of PTC of PkR1.75, forward EPS under ICH at monthly traffic of 1bn min could go up to PkR7.2 (ex-VSS), which in turn could conceivably bump up our target price to PkR50/share (assuming market P/E multiple of 7.0x). Similarly, TELE would also be a key beneficiary of the development (second highest EPS impact) followed by WTCL and WTL which should lead to multiple re-rating of these scrips in our view. We recommend a BUY stance on the sector with PTC being our conviction pick.

Risks to our call: CCP presents the biggest road block to our call, however we expect MoIT to amicably address the concerns of CCP, where the government itself would be a major beneficiary of the ICH in the form of higher foreign exchange earnings as well as improving the marketability of the telecom sector for 3G license auction. Another risk would be a huge jump in grey traffic, which could force PTA to reduce ASR in order for the sector to remain competitive. In this regard, a Usc1/min change in ASR will lead to a 13% reduction in our earnings estimates for PTC and 20% for other LDI operators.

Pakistan Market: Technical Outlook

Bearish divergence on the RSI; stay on sidelines
The KSE-100 index closed at the 15,254 level, a gain of 102 points. Volumes improved by 10% and were recorded at 224mn shares versus 204mn shares traded previously. The current pattern suggests that the index may consolidate at current levels, however, a short term correction is due. The RSI has created a bearish divergence and the Stochastic Oscillator has continued to decline, supporting the above view. At current levels, we believe investors should stay on the sidelines. The supports are at 15,187 and 15,157 level, while the index will face resistance at 15,321 and 15,351 level, respectively.

USD/CAD Intraday Technical Analysis and Trading Recommendations for August 30, 2012

The USD/CAD pair was trading in oversold position within a wide range bearish channel which is depicted on the chart in red, when the pair broke through the upper limit of the short term bearish channel presented on the chart in Blue indicating a possible bullish retracement towards price level of 0.9970 seen on Wednesday with two successful retestings of the backside of the broken channel at 0.9888 then at 0.9845 on Tuesday.

Breakout above the bearish Blue channel gives the opportunity for the USD/CAD pair to visit the upper limit of the longer term channel around the price level of 1.0025 as long as the pair is trading within the current consolidation range above 0.9845. However, the pair found resistance around price level of 0.9945 which pushed the USD/CAD pair to the backside of the broken channel 0.9845 again before further continuation of the bullish movement.

Price level of 1.0025 corresponds to Fibonacci levels of 50% and 78.6% of the most recent two bearish swings. That's why price action should be watched there for a valid long term SELL entry with SL located above 1.0080.

GBP/USD Intraday Technical Analysis and Trading Recommendations for August 30, 2012

The GBP/USD pair has resumed its bullish movement recording a higher high last Thursday at 1.5912 after breaking through 1.5750 and reaching the upper limit of the depicted channel which served as supply zone for the pair.

GBP/USD bullish movement was maintained within the depicted movement channel. However, on Friday the market witnessed some expected bearish retracement which was seen on Tuesday too.

The lower limit of the movement channel as well as the significant Support level, located between 1.5750-1.5770, were tested showing a strong bullish price action which indicated a valid low risk BUY entry as expected with SL located below 1.5700.

The most significant Resistance level is located around 1.5910; this price level was tested last week expressing obvious bearish reaction which pushed the GBP/USD pair towards the lower limit of the depicted movement channel yesterday. That's why bullish movement should break through this level in order to make other bullish swings.

Breakthrough above price level of 1.5850 is essential today in order to reach the next resistance level at 1.5910.

AUD/USD Weekly Wave Analysis

AUD/USD Elliott Wave
For the last 2 weeks the AUD/USD pair was trading in a strong downward move, developing corrective wave A (coloured green) of the bigger wave (E) (coloured orange). Yesterday during the early European session we could observe an ascending movement towards the 1.0397 level (new daily high). Therefore, at the beginning of the New York session this currency pair did not manage to hold this level and the price pushed lower reaching a 1.0347 level. At the moment the AUD/USD pair is trading around 1.0328 level and we are expecting to see the price around 0.9825 level in a few weeks. In accordance with our wave rules and taking into account that the wave E retraces 61.8% of the wave C, we can define the potential targets by measuring wave C, with Take Profit 1 at 0.9974 (50% of wave C) and Take Profit 2 at 0.9824 (61.8% of wave C) To reduce the risk, we can use resistance at 1.0410 as Stop Loss. Also it is necessary to monitor the U.S. Prelim GDP q/q, Pending Home Sales m/m, Crude Oil Inventories, Beige Book and EU German Prelim CPI m/m data that can change the rate of the pair.

Support and Resistance
(S3) 1.0283 (S2) 1.0315 (S1) 1.0332 (PP) 1.0364 (R1) 1.0381 (R2) 1.0413 (R3) 1.0430

Trading Forecast
Proceeding from Elliott Wave rules today, the trend is expected to begin the downward movement. That is why short positions at level 1.0315 with Stop Loss 1.0410, Take Profit 1 0.9974 and Take Profit 2 0.9824 are recommended.