Investors must be salivating by now; on the trading floor and elsewhere on their dinner tables, nearly everybody is talking about the latest public offering in town: Wateen Telecom.
In what could be the biggest offering in recent memory, Wateen Telecom plans to raise Rs2 billion from the public, including Rs900 million under the greenshoe option.
Of the total amount, Rs490 million will be used to purchase the remaining 49 percent stake in Wateen Solutions, a telecom infrastructure company, to make it a fully owned subsidiary, while Rs1490 million will be used to retire some loan obligations.
But what if they aren able to raise the full amount; how will they use their funds then? Well, going by the word on the street, the IPO would be heavily oversubscribed; and its not just because of investors rising appetite for risk, which rendered most recent IPOs successful.
Reportedly, the companys management, which otherwise sits in Lahore, flew down to Karachi last week and received commitments of subscription first hand. They held dinners, networked with several high net worth investors and even gave individual presentations to remove any qualms on investors minds.
And they have, looking at Wateens business model, all the more reasons to show off their venture.
Wateen is backed by the strong Abu Dhabi Group, one which has successfully been at the helm of Bank Alfalah, United Bank and Warid Telecom.
The firm has a strong business model too. Most of Wateens current revenues come from corporate businesses with several long-term contracts, which yield dollar-denominated revenues, even up to 20 years.
Though its retail business currently earns about 30 percent of the gross topline, the management plans it to increase this to 50 percent in the long run. This will be made possible through Wimax and VAS services, using its presence in 22 major cities of the country, while tapping the huge youth market of Pakistan.
In other plans, Wateen is eyeing business in Afghanistan. It has already signed VSAT agreements with Telecom Development Company Afghanistan Limited, and is currently in talks with two operators in Afghanistan. Revenue from these operations will tentatively start streaming by December 2010 or January 2011.
But the firms bouquet of product offerings doesn come without risks. The biggest of these is interest rate risk.
Based on companys own projections its interest cover is adequate to meet the interest payments. However, for a firm as highly geared as Wateen, investors worries won be out of proportion, if borrowing costs remain sticky.
By the time local interest rates start tapering off, as is likely the case, the cost of borrowing in international markets might inch up as countries start removing their stimuli. That and the typical vulnerability to business cycle downturns faced by debt-laden firms can be a potential risk.
Wateens management, which plans to reduce its debt by 43 percent between 2011 and 2014, says it aims to bring down its debt-to-equity ratio to 70:30 in 2015 and onwards.
Yet, while the Wateen would likely invite interest from value seekers, like many growth stocks, it might not attract the attention of dividend yield hunters, as the first dividend, according to firms own projections, is at least 3 years away.
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FFBL-Rs (bn)
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Change
1QCY10 1QCY09 (%)
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Turnover 6566 5856 12%
Cost of sales -4766 -5037 -5%
Gross profit 1800 819 120%
Gross margin 27% 14% -
Operating expense -609 -429 42%
Operating profit 1191 390 205%
Finance cost -99 -628 -84%
Other operating income 135 247 -45%
Profit after tax 809 13 6333%
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Source: company results
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