Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action/Valuation: Upgrade to NEUTRAL
RCOM shares are down 42% this year (vs SENSEX down 18%), making it
one of the worst-performing telcos in Asia this year. This is a function of its
inconsistent execution, weaker-than-expected operational results, concerns
around 2G license allocation reviews, a highly geared balance sheet (5x net
debt to EBITDA in 1Q12), and no success in restructuring or offloading a
stake in many of its assets. However, this doesn't mean that there isn’t any
inherent value – RCOM does have extensive wireless and fixed assets. As
highlighted in our ‘Asian submarine cables – the hidden value’ report
published today, there could be both capex and opex advantages from
owning these cables, and RCOM could be a long-term beneficiary.
However, in the near term, improving operational performance and more
critically, monetising one of its key assets (e.g. towers or cable) to
deleverage, will be the key catalysts. We also do expect further downside is
limited from here onwards given valuation support of 8x FY13F P/E, hence
our upgrade to NEUTRAL with an unchanged target price of INR90. We
note that RCOM is a volatile stock and does trade around newsflow.
Catalyst – monetising assets like submarine cables
RCOM is one of the few telcos with sole ownership of cable systems. It
owns the 65,000 km FLAG network (purchased in 2004 for USD210mn).
Subsequently, it extended its reach to include Falcon (India –Middle East)
and Hawk (linking the Mediterranean). Total book value of GlobalCom
(which includes submarines) was USD3.5bn as of March 2011, versus its
current market cap of USD4bn and EV of USD11bn. Also, if we back out the
contribution from the fixed business at a 6x EV/EBITDA multiple, the implied
value of the wireless business at 7x is a discount to its domestic peers.
Upgrade to NEUTRAL
Within our AEJ coverage, RCOM is one of the few telcos with sole ownership of cable
systems. It owns and operates the FLAG network, spanning 65,000km, which was
purchased in 2004 for USD210mn when the latter was in bankruptcy. Subsequently,
RCOM has extended its network to include Falcon (India –Middle East) and Hawk
(linking the Mediterranean). RCOM’s investment in its GlobalCom segment, which
includes submarine cables as well as RCOM’s overseas interests such as Yipes and
Vanco, was USD3.5bn as of March 2011. In an effort to unlock value, the company had
also been looking to divest this business (RCom may sell FLAG in bid to raise $3bn, Live
Mint, December 2009). More recently, RCOM has reorganized its domestic and
international fixed businesses into a single segment for higher cost efficiencies.
Despite an extensive asset portfolio, RCOM has struggled with execution in the last two
years. On our SoTP analysis, if we back out the contribution from the fixed business at a
6x EV/EBITDA multiple, implies that the wireless business is trading at only 7x, a
discount to its domestic peers. Nevertheless, we believe operational turnaround will
remain the key driver for the stock in addition to potential M&A/divestment of towers, etc.
Wireless trends are seeing some improvement and RCOM’s reorganisation of fixed
businesses could help – though more evidence of sustained improvement is needed to
increase investor confidence, in our view. Notwithstanding this, we also expect limited
downside from here onwards given valuation support of 8x FY13F P/E; hence, we
upgrade our rating to NEUTRAL. RCOM is a volatile stock and does trade around
newsflow.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action/Valuation: Upgrade to NEUTRAL
RCOM shares are down 42% this year (vs SENSEX down 18%), making it
one of the worst-performing telcos in Asia this year. This is a function of its
inconsistent execution, weaker-than-expected operational results, concerns
around 2G license allocation reviews, a highly geared balance sheet (5x net
debt to EBITDA in 1Q12), and no success in restructuring or offloading a
stake in many of its assets. However, this doesn't mean that there isn’t any
inherent value – RCOM does have extensive wireless and fixed assets. As
highlighted in our ‘Asian submarine cables – the hidden value’ report
published today, there could be both capex and opex advantages from
owning these cables, and RCOM could be a long-term beneficiary.
However, in the near term, improving operational performance and more
critically, monetising one of its key assets (e.g. towers or cable) to
deleverage, will be the key catalysts. We also do expect further downside is
limited from here onwards given valuation support of 8x FY13F P/E, hence
our upgrade to NEUTRAL with an unchanged target price of INR90. We
note that RCOM is a volatile stock and does trade around newsflow.
Catalyst – monetising assets like submarine cables
RCOM is one of the few telcos with sole ownership of cable systems. It
owns the 65,000 km FLAG network (purchased in 2004 for USD210mn).
Subsequently, it extended its reach to include Falcon (India –Middle East)
and Hawk (linking the Mediterranean). Total book value of GlobalCom
(which includes submarines) was USD3.5bn as of March 2011, versus its
current market cap of USD4bn and EV of USD11bn. Also, if we back out the
contribution from the fixed business at a 6x EV/EBITDA multiple, the implied
value of the wireless business at 7x is a discount to its domestic peers.
Upgrade to NEUTRAL
Within our AEJ coverage, RCOM is one of the few telcos with sole ownership of cable
systems. It owns and operates the FLAG network, spanning 65,000km, which was
purchased in 2004 for USD210mn when the latter was in bankruptcy. Subsequently,
RCOM has extended its network to include Falcon (India –Middle East) and Hawk
(linking the Mediterranean). RCOM’s investment in its GlobalCom segment, which
includes submarine cables as well as RCOM’s overseas interests such as Yipes and
Vanco, was USD3.5bn as of March 2011. In an effort to unlock value, the company had
also been looking to divest this business (RCom may sell FLAG in bid to raise $3bn, Live
Mint, December 2009). More recently, RCOM has reorganized its domestic and
international fixed businesses into a single segment for higher cost efficiencies.
Despite an extensive asset portfolio, RCOM has struggled with execution in the last two
years. On our SoTP analysis, if we back out the contribution from the fixed business at a
6x EV/EBITDA multiple, implies that the wireless business is trading at only 7x, a
discount to its domestic peers. Nevertheless, we believe operational turnaround will
remain the key driver for the stock in addition to potential M&A/divestment of towers, etc.
Wireless trends are seeing some improvement and RCOM’s reorganisation of fixed
businesses could help – though more evidence of sustained improvement is needed to
increase investor confidence, in our view. Notwithstanding this, we also expect limited
downside from here onwards given valuation support of 8x FY13F P/E; hence, we
upgrade our rating to NEUTRAL. RCOM is a volatile stock and does trade around
newsflow.
No comments:
Post a Comment