Wateen’s unrealistic expectations

KARACHI: On the surface, it is a great buy. Wateen Telecommunications holds a 65 per cent market share in the wireless broadband internet market in Pakistan, easily one of the fastest growing subsectors with the telecommunications industry.

It is expected to post a net loss for the fiscal year ending June 30, 2010 but has a steady history of profitability and a wide infrastructure that it can leverage to its advantage. So why aren’t analysts screaming from the rooftop about the company’s initial public offering?

While many research analysts at leading investment banks issued reports on the firm, only one of them came away with a gushing recommendation: Omar Rafiq of BMA Capital.

In fairness, Rafiq’s report was the most comprehensive amongst all of those reviewed by The Express Tribune. But the fact that none of his colleagues up and down Chundrigar Road seemed to agree with him should be somewhat disconcerting to the company and should give pause to any potential investors.

Let us take a look at the case being made by the company and its underwriters – Arif Habib Ltd – for investing in the company. As stated earlier, the firm has the largest WiMAX network in the world with a bandwidth of 3.5 GHz. That is no small feat especially considering the fact that most telecom industry observers feel that wireless broadband is the wave of the future in the industry, particularly in emerging markets that do not have an existing fixed-line infrastructure.

Wateen has invested in a massive capital expansion which will allow the firm to roll out its services nationwide and compete for the broader market for broadband internet, currently dominated by Pakistan Te l e c o m m u n i c at i o n s Company’s fixed-line network. However, there are several questions that the firm leaves out. In the entire investment memorandum, the company does not graphically represent its subscriber base even once.

If it did, it would have to show that Wateen’s client base has declined, as has its market share as Mobilink, Pakistan’s largest cellular phone operator, launched its Infinity service in major cities. And given the fact that the entire case for investment rests on an 80 per cent increase in revenues during the next fiscal year, one can imagine why that graphic would be inconvenient. After all, why would any investor believe that Wateen will be able to expand its customer base that rapidly when it has been losing market share over the past year?

Another key component of the firm’s expansion plans includes expanding its network into Afghanistan, Iran and India. Given the geopolitical uncertainty that characterises Pakistan’s commercial ties with its neighbours, one is perplexed as to how it can be such an important element of Wateen’s growth strategy.

Even BMA Capital’s Omar Rafiq, who was the most optimistic about the firm’s prospects, viewed its medium term expansion plans to be somewhat suspect. “We expect growth at Wateen but not in the immediate future,” said Rafiq in a report issued to clients. To sum up, JS Global Capital’s analysts have no comment on the IPO, though they are bullish on the sector (which really means they just like PTCL) and Invest Capital has a neutral stance. One would expect this IPO to struggle, yet the reality is that the equity-starved investors in the country will most likely soak up the share and come back begging for seconds.