Wateen Telecom has offered its shares for public offering and I analyzed Wateen Telecom to put forward my recommendation to investors, for my company. I recommended investors to not subscribe to the IPO. I have attached a copy of my report with the post and it can be viewed here:
However, there were lot of other points that I could not mention in the report which I found during my analysis. I am listing them below:
- Revenues from dark fiber were also involved in many international accounting scandals like Enron, WorldCom and Qwest. These companies used to swap “dark fiber” optical cable that was in the ground but not activated without any exchange of cash. On the base of such revenues, these companies used to project highly optimistic predictions from this segment. Raising out this issue does not mean that Wateen Telecom is involved in any such activities. This is just a point that I came across during my analysis on the company.
- The company has capitalized PKR474mn of interest costs during FY09. Had they been expenses, the profit would have been lower by PKR300mn. Though accounting standards allow capitalization of finance cost of debt raised for capital expenditure, any company can manipulate the income statement by capitalizing excessive interest cost.
- Operating profit increased from PKR1100mn in FY08 to PKR1800mn in FY09 whereas cash flow from operating activities drastically declined from PKR5400mn in FY08 to ONLY PKR4mn in FY09. This opposite trend between the two is a red sign if it continues as a trend.
- There is a significant use of related party transactions by Wateen Telecom. This, although is not illegal or “wrong”, it raised suspicion for me as an analyst.
- While sales revenue and receivables have significantly jumped in FY09, the bad debt expense actually declined by 99% YoY from PKR88mn to PKR3mn in FY09. Hmmm!
- Receivables have grown at a higher rate as compared to sales. (sales increased by 61% in Fy09 where as receivables increased by 105%). The same trend can be witnessed in the management’s future projections for the company. Increase in receivable turnover period from 64 days in FY07 to 76 days in FY09 also further highlights the point.
- Increasing payables turnover over period from 40 days in FY07 to 71 days in FY09 also indicates deferring of expenses by the company.
- An extended du-pont analysis clearly explains the company’s dependence on leverage.
- Accrual analysis also suggests the company’s reliance on accruals (both BS accruals and CF accruals). The same issue is highlighted by the disproportionate trend between cash collections and revenues.
- Although I have mentioned in my report that Wateen changed its depreciation rates which resulted in a lower depreciation expense of PKR400mn, it must mention that the new depreciation rates are more close to the depreciation rates used by other telecom companies like PTCL, Worldcall, Telecard.
- WiMAX service is interesting but the reality is that most of the customers are using PTCL broadband and wireless broadband is mostly used at places where PTCL cannot reach like student hostels etc. Since Wateen WiMAX is present in 22 major cities, there might not be much room for such high WiMAX sales in those cities owing to presence of PTCL and other broadband operators.
- Internationally, telecom companies have been boosting revenues through different tricks like:
‘In one such swap, executed in the first half of 2001, Global Crossing “sold” $100 million of capacity to Qwest Communications, which was also suffering a demand slowdown, while “buying” an equal amount of capacity from the same firm. The $100 million price tag was an essentially arbitrary value placed on the transaction by executives of both companies. The asset they were trading was unused fiber-optic capacity (known in the industry as “dark fiber”), for which there was no demand and for which there might be no demand for years to come. Nearly 20 percent of Global Crossing’s $3.2 billion in revenue in the second quarter of 2001 came from capacity swaps. For the first nine months of 2001, such swaps accounted for $600 million of Qwest’s $15 billion in revenue. While the amount of the swaps appears modest as a percent of total revenue, it accounted for most of the company’s sales growth in that period.’ FT Press
- Another one worth reading is:
‘The accounting firm Ernst & Young analyzed 41 UK software firms and characterized the revenue-recognition practices of more than half of them as poor or very poor. And in 2002, the UK-based Vodafone, the world’s largest mobile phone operator, admitted to playing games similar to those played by Edison Schools and Professional Detailing. It booked all the revenue generated by wireless Internet services, even when it redirected a sizable portion of that revenue to third parties that actually provided the Internet content. Vodaphone’s practice stands in sharp contrast to that of rivals MMO2, the mobile business spun off by BT, and Orange, the mobile arm of France Telecom, both of which strip out of reported revenues any amount owed to third-party content providers. In its defense, Vodaphone says that the payments made to third parties are treated as cost of sales—that is, an expense—leaving gross profit and other profit measures unaffected by the practice. Besides, says the company, the amounts involved represent only a small percentage of overall group revenues. Then why bother with the practice at all? One answer suggests itself: By inflating revenue relative to major competitors, Vodaphone can report higher average revenue per user, a statistic (or metric, in business-speak) closely watched by telecom analysts. ‘ FT Press
- Another tool used by telecom companies is the use of percentage of completion method which is deemed quite aggressive. I looked for data about percentages of completion method or installment sales or barter trades in Wateen’s account but I could not find any such hint. Note that these are some of the frequent dubious techniques used by international telcos to boost revenues.
These were some of the points that I came across during my analysis of Wateen Telecom. What do you think?