Resilience in troubled times

AsiaCell 17 March 2016 QuickView

AsiaCell

Resilience in troubled times

Cellular telecoms

QuickView

17 March 2016

Price

IQD6.00

Market cap

IQD1,860bn

Share price graph

Share details

Code

TASC IQ

Listing

Iraq SE

Shares in issue

310.0bn

Business description

AsiaCell is the leading cellular services provider in Iraq. The company was founded in Kurdistan in 1999, and became Iraq’s first national operator in 2012. AsiaCell had 10.6 million subscribers at end Q315, representing a 37% subscriber market share. Qatari operator Ooredoo has an effective 64.1% stake.

Bull

Leading operator in Iraq in revenue terms with 37% subscriber market share at end Q315 (Number two Zain: 39% subscriber share).

Strong revenue potential from recently rolled out 3G network given pent-up demand for broadband services in Iraq, with only 5% fixed-line density.

Well-run company with net cash of IQD417bn ($376m) at 30 September 2015.

Bear

Iraq conflict could lead to more severe and/or permanent diminishment in operational area.

Weak oil price reduces spending power of subscribers and increases risk of increased taxes.

Strongly competitive three-player market with a combined penetration of 94%.

Analysts

Anna Bossong

+44 (0)20 3077 5737

Bridie Barrett

+44 (0)20 3077 5757

AsiaCell is the leading cellular operator in Iraq in revenue terms, with a 37% subscriber market share and network coverage of 99% of the Iraqi population. Despite network suspensions arising from insurgent activity in Iraq, AsiaCell has consistently remained profitable over the last six years. A new 20% sales tax on top-up cards and post-paid services, deterioration in Iraq’s economy on lower oil prices and a worsening security situation – causing more network suspensions – resulted in 9M15 EBITDA falling 28% y-o-y. We see potential for further deterioration in EBITDA in 2016, but the stock presents significant upside potential from current levels in the event of an improvement in the security situation in Iraq.

Earnings put under multiple pressures in 2015…

The recent escalation of the conflict in Iraq has disrupted AsiaCell’s operations, leading to a suspension of networks covering some 20% of the population. As a result, subscriber numbers fell 14% y-o-y to 10.6 million at end Q315, while revenue per subscriber fell 8% y-o-y in 9M15, also affected by a hike in service taxes. As a result, 9M15 EBITDA declined 28% to IQD485bn. Additional D&A from 3G licence acquisition ($40m pa) and modernisation and high provisions for disputed income tax claims for previous years led to an 82% y-o-y fall in net profit.

…but strong pent-up demand favours 3G operations

AsiaCell rolled out 3G across 56% of the population after acquiring a licence for $307m in 2014. Despite difficult conditions, 3G subscriber numbers grew to 2.3 million or 21% of total subscribers by mid-2015, a sign of strong pent-up demand for broadband services in Iraq, given only five fixed lines per 100 people.

Valuation: High risk/return trade-off

We believe that the 2016 EBITDA consensus targets are reasonable, but think that income tax is unlikely to fall to the level required to achieve the 2016 net profit consensus. Longer term, any significant reduction in territory held by insurgents could drive a sharp increase in revenues and earnings, with AsiaCell expecting to be able to reactivate operations in suspended areas with low additional capex. On 2015e consensus, the stock trades on an EV/EBITDA of 2.4x, which is substantially below the international and regional sector averages of 5.9x and 4.9x, respectively. While arguably too risky for ordinary portfolio investment, with its strong balance sheet and gearing to improvement in the geopolitical situation, we believe the stock is one to watch in the case of an improvement in the security situation in Iraq.

Consensus estimates

Year
end

Revenue
(IQDbn)

EBITDA
(IQDbn)

PBT
(IQDbn)

EPS
(IQD)

DPS
(IQD)

EV/
EBITDA* (x)

P/E
(x)

Yield
(%)

12/14

2,012

878.9

459

1.11

0.00

1.6

5.4

N/A

12/15e

1,540

594.0

182

0.22

0.11

2.4

27.3

1.8

12/16e

1,500

577.0

211

0.48

0.24

2.5

12.5

4.0

12/17e

1,632

636.0

277

0.77

0.39

2.3

7.8

6.5

Source: Bloomberg. Note: *EV/EBITDA calculated using 30 September 2015 net cash.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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