Telecommunications Services of Trinidad and … Research...broadband services via its Worldwide...

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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.

Company Facts

Industry Telecommunications and Broadcasting

Bond Credit Rating Moody’s: B2 (Stable) CariCRIS: CariA-

Financial Year End 31-Mar

Terms Of Investment

Security TSTT Fixed Rate Bond

Issuer Telecommunications Services of Trinidad and Tobago

Size of Issue USD 400M (USD 300M; USD 100 – TTD equivalent)

Coupon USD – 8.875%; TTD – 8.30%

Coupon Frequency Semi‐annual payments

Interest Basis 30/360 day basis

Term 10 Years (Avg. Life of 8.75 yrs.)

Principal Repayment 7 Yr. Moratorium, Equal Semi-Annual payments thereafter.

Rank Pari Passu with any other Senior Secured Debt.

October 2019 David Paul Investment Analyst [email protected]

Telecommunications Services of Trinidad

and Tobago (TSTT) PLEASE SEE IMPORTANT DISCLOSURES TSTT is a majority government‐owned telecom

company and the leading provider of communications

services in Trinidad and Tobago. TSTT offers fixed

line services on the largest digital network in the

country, mobile services on a FDD LTE 4G network,

and fixed wireless broadband services on a TDD LTE

network. It also provides metro Ethernet network

services, videoconferencing, subscription‐based IP

television (“IPTV”), digital terrestrial television, as

well as business and home alarm monitoring services.

They have 86 exclusive branded dealer retail stores

and approximately 4,800 card resellers and electronic

top up points in Trinidad &Tobago.

Overvalued Fairly valued Undervalued

9.87%

9.69%

2014 2015 2016 2017 2018

GDP Growth Rate -1.3% 1.9% -6.5% -2.0% 0.3%

Industry RevenueGrowth

1.9% -0.6% -0.3% 7.8% 7.8%

TSTT RevenueGrowth

2.7% -2.0% -4.0% 1.9% -8.9%

-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%

TSTT Vs Industry (Revenue Growth)

9.29%

2


51% 49%

100% 54.5%

45.4%

TSTT

NELCable & Wireless

(West Indies)

Limited

Nuklyus Company

of Tobago Limited

Amplia

Communications

Limited

Eco-Industrial

Development

Company of Tobago

Valuation Report

Valuation Report Company Overview

Telecommunications Services of Trinidad and Tobago

Limited (TSTT) was formed in 1991 with the merger of the

domestic carrier, Trinidad and Tobago Telephone Company

Limited (TELCO) and the international carrier, Trinidad and

Tobago External Telecommunications Company Limited

(TEXTEL). TSTT is jointly owned by National Enterprises

Limited (NEL) (51%) and Cable & Wireless (C&W) (49%).

NEL is majority owned by the Government of the Republic

of Trinidad and Tobago (GORTT). C&W West Indies has

been seeking to dispose of its 49% shareholding since 2015

when its parent company acquired Columbus International

Inc., the parent company of Columbus Communications

Trinidad Limited (Columbus Trinidad). As a result, C&W

West Indies became a direct competitor of TSTT in the

Trinidad and Tobago market.

Company Overview

Telecommunications Services of Trinidad and Tobago

Limited (TSTT) was formed in 1991 with the merger of the

domestic carrier, Trinidad and Tobago Telephone Company

Limited (TELCO) and the international carrier, Trinidad and

Tobago External Telecommunications Company Limited

(TEXTEL). TSTT is jointly owned by National Enterprises

Limited (51%) and Cable & Wireless (C&W) (49%).

National Enterprises Limited (NEL) is majority owned by the

Government of the Republic of Trinidad and Tobago

(GORTT). C&W West Indies has been seeking to dispose of

its 49% shareholding since 2015 when its parent company

acquired Columbus International Inc., the parent company of

Columbus Communications Trinidad Limited (Columbus

Trinidad). As a result, C&W West Indies became a direct

competitor of TSTT in the Trinidad and Tobago market.

Table of Content Company Snapshot……………..1 Company Overview……………..2 The Offer……...………………….3 Business Model………………….4 Organizational Structure………..5 Industry Overview……………….6 Financial Analysis……………….9 Recent Financial Performance..11 Cash Flow Projections…………12 Competitive Strengths…………13

Risk Factors…………………….14

Valuation………………………..15

Recommendation……………...16 Appendix……………………….17 Table of Content Company Snapshot……………..1 Company Overview……………..2 The Offer……...………………….3 Business Model………………….4 Organizational Structure………..5 Industry Overview……………….6 Financial Analysis……………….9 Recent Financial Performance..11 Cash Flow Projections…………12 Competitive Strengths…………13

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The Offer

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Business Model

TSTT’s principal activities include the provision of fixed, mobile and broadband

telecommunications products and services, security surveillance and digital television services,

and the Company holds either the number 1 or number 2 position in many of the markets it serves.

TSTT’s customer base is wide and varied, comprising individuals, households, corporations,

government and state-owned agencies. Since 1995, the Company’s fixed line services have moved

from an analogue to a 100% digital network which has the capacity to service over 300,000

customers. In addition to fixed line services, the Company offers 4G mobile and wireless

broadband services via its Worldwide Interoperability for Microwave Access (Wi-Max), Evolved

High-Speed Packet Access (HSPA+) and Long-Term Evolution (LTE) technologies. TSTT also

provides Metropolitan-area Ethernet (Metro Ethernet) services, TelePresence and Video

Conferencing, subscription-based Internet Protocol television (IPTV), Digital Video Broadcasting

Terrestrial Technology, as well as business and home alarm monitoring services. TSTT offers a

wide range of handsets with a number of popular brands available including Samsung, Huawei

and Apple; TSTT has exclusive distribution rights for the Apple iPhone.

As at March 31, 2019, TSTT had approximately 860,000 mobile subscribers, 184,000 fixed line

customers, 83,000 residential broadband customers, 17,000 pay television customers, 19,000 home

security customers, over 3,600 business customers, 66 government customers and 31,500 mobile

services users in their Enterprise Solutions business area. They are the only company that offers

the full range of communications services (including fixed voice, mobile, broadband Internet,

entertainment and security) in Trinidad and Tobago.

44%

31%

22%

3%

REVENUE MIX

Mobile Services Residential Services. Enterprise Solutions Carrier Services.

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The mobile services segment is TSTT’s largest revenue line contributing 44% of total revenue in

Financial year (FY) 2019. TSTT enjoyed a 45.2% share of the market as at December 2018, up

from 44.6% in March 2018, despite aggressive competition from other traditional players and the

ready availability of over-the-top (OTT) applications such as WhatsApp, Viber and FaceTime.

This was a result of the launch of its 4G LTE service using alternative available spectrum and

supported by its expansive cell tower network. With traditional voice in decline, and market needs

shifting towards data plans, TSTT adjusted to the changing environment by introducing more

unlimited plans with competitive prices.

Organizational Structure

Old Structure

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New Structure

TSTT has begun the process of redesigning its’ organizational structure in order to improve

accountability and responsibility of management. This redesign begun with the reduction of

executives from 19 to 10. TSTT’s new executive structure is expected to improve accountability

throughout the organization and enable sustainable and profitable growth.

Industry Review

In 2018, the telecommunications and broadcasting sectors generated an estimated TTD 5.64 billion

in revenues. When compared to the previous year, this represented a 7.8% increase in total

revenues generated. During the period under review, the telecommunications sector contributed

TTD 4.28 billion, or 75.9%, while the broadcasting sector contributed TTD 1.36 billion, or 24.1%.

The internet market was the leader in terms of revenue generation with an estimated TTD 1,972.1

million, accounting for approximately 30.5% of total revenues. This was followed by mobile voice

services (21.1%) which contributed TTD 1,190.1 million and pay TV services (12.5%) which

contributed TTD 703.1 million of revenues earned.

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The fixed voice market decreased minimally in 2018, with subscriptions standing at 317,500, a

decrease of 1,200, or 0.4%, when compared to 2017. Similarly, mobile voice subscriptions and

mobile Internet subscriptions also decreased, by 2.9% and 3.7%, respectively. Pay TV

subscriptions decreased by 4.9%, to record 234,700 at the end of 2018. The number of

subscriptions in the fixed Internet market, however, continued to grow in 2018, approximating

341,300 subscriptions a 4.4% increase when compared to the same period in 2017.

Gross revenues from the free-to-air (FTA) television market continued to decline. Total gross

revenues for this market amounted to TTD 71.2 million, a decrease of TTD 5.9 million, or 7.7%,

when compared to the previous year. Similarly, a decrease in revenues of TTD 12.4 million, or

approximately 8.1%, within the FTA radio broadcasting market was also observed.

Using the Herfindahl-Hirschman Index (HHI), the calculated level of concentration in the fixed

Internet market for 2018 stood at 2,432.0, decreasing from 3,158.4 in December 2017. Similarly,

the HHI in the fixed voice market and the mobile voice market also decreased in 2018, by 12.3%,

(4,132.5) and 0.71% (5030), respectively. Conversely, the level of concentration in the pay TV

market increased minimally by 2.3%, from 2,964.5 points at the end of 2017 to 3,032.3 points at

the end of 2018.

35%

21%

13%

10%

5%

3%

1%2%

10%

Industry Revenue Mix

Internet Services

Mobile Voice Services

Pay TV Services

Fixed Voice Services

International Voice Market

FTA Radio

FTA Television

Leased line services

Other Revenues

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Trinidad and Tobago is characterized by a relatively young population with approximately 32%

under the age of 25, compared to approximately 27% in Europe and 33% in the United States.

Trinidad and Tobago has a relatively advanced network infrastructure with eight operators

currently active in Fixed-Internet access services and two wireless operators (including TSTT)

offering mobile service. Fixed-line penetration is approximately 67.5% of households according

to Telecommunications Authority of Trinidad and Tobago (TATT). Mobile penetration is

approximately 148%. Fixed-line broadband penetration is approximately 80% of households.

TSTT is the only company offering each of mobile, fixed line, broadband, pay television, security

and data center and cloud services in Trinidad and Tobago. They face significant competition in

each of the market segments in which they operate and competitive pressures could have a material

adverse impact on their business. The nature and level of the competition they face varies for each

of the products and services offered. Their main competitors include:

Cable & Wireless (Flow): Provides only fixed line, broadband and pay television. Cable &

Wireless is the leading cable television provider in the Trinidad and Tobago market. In

addition to being one of TSTT’s principal competitors, Cable & Wireless also owns 49%

of TSTT’s shares.

Digicel: Provides mobile, fixed line, broadband and pay television. Digicel is a leading

provider of communications services in the Caribbean region, with operations in 25

markets.

Green Dot: Provides only broadband and pay television.

Caribel: Provides only broadband.

DirecTV: Provides only pay television.

TSTT is the market leader in the fixed line services segment with a market share based on revenue

that has averaged approximately 80% over the period from December 31, 2014 to December 31,

2018 and which was approximately 80% as at March 31, 2019 based on TATT data. In the fixed

line segment, TSTT competes primarily with Digicel and FLOW, which each have a market share

of approximately 10-12%, based on TATT data. FLOW and Digicel have emerged as aggressive

fixed line competitors in recent years and have captured a substantial portion of market share from

TSTT. TSTT’s fixed line market share by number of subscriptions declined from March 31, 2018

to March 31, 2019. Overall, the size of the fixed line market in Trinidad and Tobago is decreasing

primarily due to the shift in consumer behavior driven by the use of OTT services and to a lesser

extent due to mobile substitution.

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In the mobile services segment of the market TSTT’s only competitor is Digicel, which entered

the market in 2006, prior to which TSTT were the exclusive mobile operator in the country. They

compete with Digicel for customers principally on the basis of services offered, price, marketing

initiatives, quality and reliability of service and coverage area. They have the leading position in

this segment based on revenue, with approximately 52% of the market in terms of revenue in the

fiscal year ended March 31, 2019, while Digicel is the market leader in terms of number of

subscribers.

In the residential broadband Internet and pay television segments, they compete primarily with

Digicel and FLOW. In the broadband Internet segment, they have an approximate 31% market

share in terms of subscriptions and an approximate 20% market share in terms of revenue in each

case. Their market share in this segment has been declining over the past five years, largely due to

strong competition. In the entertainment segment, TSTT’s market share was approximately 8% in

terms of subscriptions at the end of fiscal year 2019. Their market shares in both the broadband

Internet and entertainment segments have been declining in recent years due to strong competition.

In the security segment, TSTT is believed to be the market leader based on revenues, as they

compete with a number of smaller market participants.

Financial Analysis

MM MM MM MM MM MM MM MM

Operating Revenue 2455.23 2638.92 2896.61 2842.49 2961.31 3,023.22 2,944.63 2,989.99 -17.9%

Operating Expenses 2050.63 1595.16 1713.47 1531.29 1505.16 2,297.22 1,453.66 1,425.04 43.9%

EBITDA -560.50 597.71 585.01 360.24 872.44 8.62 770.53 851.77 -165.8%

PAT -1145.10 -21.44 41.22 -300.75 212.89 -443.32 22.45 91.67 -1349.1%

Total Borrowings 3054.36 1895.60 1779.18 947.40 669.39 611.40 822.18 923.15 230.9%

Cash 277.28 184.48 776.41 447.51 802.62 648.34 406.38 394.75 -29.8%

Total Assets 5329.82 5189.42 4948.39 4277.86 5208.02 5,105.00 5,017.18 5,216.79 2.2%

Operating Cash Flows -153.60 560.40 117.92 233.46 648.83 884.64 778.19 653.29 -123.5%

Metrics

EBITDA Margin -22.8% 22.6% 20.2% 14.6% 29.4% 0.3% 26.2% 28.5%

PAT Margin -46.6% -0.8% 1.4% -12.2% 7.2% 14.7% 0.8% 3.1%

Return on capital employed -40.0% 2.3% 4.7% -11.5% 10.5% -16.3% 2.2% 4.5%

Return on Assets -21.5% -0.4% 0.8% -4.4% 2.7% -5.8% 0.3% 1.1%

Interest Cover -9.8x 0.9x 2.0x 8.0x 25.8x 23.8x 17.4x 13.5x

Operating Cash Flow / Debt Servicing Burden -0.1x 0.3x 0.1x 0.3x 1.4x 3.5x 2.8x 2.1x

(Operating Cash Flow + Cash) / Debt Servicing Burden 0.0x 0.4x 0.5x 0.8x 3.1x 6.0x 4.3x 3.4x

Total Debt / Net Worth 4.1x 0.9x 1.2x 0.4x 0.3x 0.3x 0.3x 0.3x

Current Ratio 0.5x 1.2x 1.6x 0.7x 1.4x 1.6x 1.2x 1.1x

Note: Green arrows indicate growth while red indicate contractions

TSTT's Financial Summary FY 2016 FY 2015 FY 2014 FY 2013 FY 20128 yr %

changeFY 2017FY 2018FY 2019

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For the financial year ended March 31st, 2019 (FY 2019), TSTT reported a loss after tax of TTD

1.1 billion, the second consecutive annual loss. This loss was driven by a 7% decline in revenue,

as all lines of revenue reported declines in the financial year. The decrease was primarily

attributable to decreases in revenues from Enterprise Solutions and Residential Services.

Cost of Goods Sold also declined by 5.8%, as a result the Company was able to maintain its Gross

Profit Margin of 82.8%, relatively unchanged from the prior year. The decrease was mainly due

to a decrease in Mobile Services cost of sales, which was primarily due to a 35.2% decrease in the

number of mobile devices sold in FY 2019 as compared to FY 2018.

Operating expenses, however, increased by 28.6%, mainly on account of re-organization costs

which amounted to TTD 638 million. This one-off expense represented primarily separation costs

associated with the exit of approximately 700 employees. In the absence of this cost, operating

expenses would have declined by 11.4%. Personnel costs also decline by 44.8% as a result of the

reduction in employees and the closing of nine owned and operated retail stores in FY 2019. In

addition, there was a reduction in the number of contract workers between the two FYs.

Depreciation and amortization increased by TTD 114.2 million, or 23%, to TTD 614.2 million in

the FY 2019 from TTD 500.0 million in FY 2018. The increase was due to an increase in technical

assets related to the fiber rollout, fixed wireless (WTTx) and certain other projects.

In FY 2019, TSTT recorded a one off impairment expense of TTD 551.6 million. An impairment

test was performed on their assets and impairment was recorded due to the value of the assets being

greater than the recoverable amount.

Operating profit decreased by TTD 1.27 billion to a loss of TTD 1.18 billion in FY 2019 from a

profit of TTD 96.3 million in the FY 2018, as a result of the factors discussed above.

Finance costs increased by TTD 16.9 million, or 16%, to TTD 119.9 million in FY 2019 from TTD

103.0 million in FY 2018. The increase was due to an increase in vendor financing for the purchase

of equipment as well as the borrowing of an aggregate of TTD 832 million under the Ansa Short

Term Loan Facility in FY 2019. Interest cover deteriorated to -9.8 times, thereby causing the

Company to utilize existing cash to service its debt. TSTT’s total borrowings increased by 61.1%

to TTD 3 billion, bringing the Company’s Total Debt to Net Worth ratio to 4.1 times, compared

to 0.9 times in FY 2018.

Tax expense was a benefit of TTD 149.5 million in FY 2019 as compared to an expense of TTD

26.8 million in FY 2018. The benefit in FY 2019 was attributable to the losses incurred in that

year.

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Liquidity, as measured by the Group’s current ratio was tight at 0.5 times as at March 2019

compared to 1.2 times one year earlier. Leading this outturn was a build-up of receivables in excess

of TTD 500 million from the Ministry of National Security. As a result of the increase, receivables

in days rose to 133, up from 100 a year earlier. In addition, the Company’s US dollar denominated

payables increased by 128% during the period to the USD equivalent of TTD 121 million,

reflecting the challenges in accessing US currency in a timely manner in T&T. Further, accrued

expenses increased by 108% to TTD 174.5 million in FY 2019 as a result of increased accruals for

Trinidad and Tobago Electricity Commission and Universal Services Fund.

For FY 2019, TSTT had net cash used in operating activities of TTD 153.6 million, compared to

net cash generated from operating activities of TTD 560.4 million for FY 2018. This change was

mainly due to an operating loss before working capital of TTD 196.7 million in FY 2019 as

compared to an operating profit before working capital profit of TTD 656.1 million in FY 2018.

Net cash used in investing activities was TTD 607.9 million for FY 2019, compared to TTD 941.0

million for FY 2018. The decrease of TTD 333.1 million between the two financial years was

primarily attributable to the acquisition of Massy Communications (Amplia) for TTD 215 million

in FY 2018. In addition, purchases of plant and equipment decreased to TTD 616.0 million in FY

2019 as compared to TTD 763.5 million in FY 2018.

Net cash generated from financing activities was TTD 749.5 million for FY 2019, compared to net

cash used in financing activities of TTD 211.3 million for FY 2018. This change was primarily as

a result of borrowings during FY 2019 of TTD 846.2 million under the ANSA Short Term Loan

Facility and other borrowings made during FY 2019.

The total net cash outflow for FY 2019 was TTD 12.0 million, compared to a net cash outflow of

TTD 591.9 million for FY 2018, for the reasons outlined above.

Recent Financial Performance

MM MM MM

Operating Revenue 633.08 630.10 2.98

Operating Expenses 316.39 417.03 -100.64

EBITDA 189.20 107.18 82.02

PAT 8.48 -5.34 13.82

Total Borrowings 2944.32 1948.99 995.33

Cash 321.41 277.28 44.14

Total Assets 5470.98 5354.39 116.59

Operating Cash Flows 94.04 -6.10 100.14

change

Note: Green arrows indicate growth while red indicate contractions

TSTT's Financial Summary3-months

ended June

2019

3-month

ended June

2018

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For the 3-month period ended June 2019, the Group saw a year on year (yoy) improvement in

financial performance with a profit after tax (PAT) of TTD 8.5 million compared to a TTD 5.3

million loss after tax for the corresponding period in the prior year. The improvement in financial

performance was led by a TTD 100.6 million decline in operating expenses which was driven by

a TTD 76.4 million decline in personnel costs following the completion of the staff rationalization

exercise. TSTT expects to realize significant cost savings, of approximately TTD 270 million

annually.

Revenue increased by TTD 3.0 million, or 0.5%, to TTD 633.1 million in the three months ended

June 30, 2019 from TTD 630.1 million in the three months ended June 30, 2018. The slight

increase was primarily attributable to an increase in revenues from Enterprise Solutions, which

increase was offset in part by decreases in Mobile Services and Residential Services revenue.

Cost of sales increased by TTD 21.6 million, or 20%, to TTD 127.5 million in the three months

ended June 30, 2019 from TTD 105.9 million in the three months ended June 30, 2018. The

increase was due to increases in each of equipment usage, commissions and outpayments.

Finance costs increased by TTD 14.8 million, or 53%, to TTD 42.8 million in the three months

ended June 30, 2019 from TTD 28.0 million in the three months ended June 30, 2018. The increase

is the result of the significant increase in borrowings from TTD 2.0 billion as of June 30, 2018 to

TTD 3.0 billion as of June 30, 2019.

Cash Flow Projections for the Life of the Bond

In the absence of official cash flow projections from TSTT, various assumptions were made given

the company’s pronouncements concerning cost reduction and future growth. The state of the

economy as well as the state of the telecommunications sector were also accounted for in making

these assumptions.

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Cash Flows Generated From Operating Activities 731 805 813 822 834 847 861 869 856 843

Investing Activities (350) (350) (350) (350) (350) (350) (350) (350) (350) (350)

Financing activities (54) (276) (293) (308) (323) (336) (348) (888) (1,379) (1,327)

Net Decrease or Increase in Cash 327 179 170 164 161 161 162 (369) (873) (833)

Cash at the beginning of the Year 277 604 784 954 1,118 1,279 1,440 1,602 1,233 360

Cash at the end of the year 604 784 954 1,118 1,279 1,440 1,602 1,233 360 (473)

(TT$ thousands)

Projected Cash Flow Data

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In the cash flow projection above, revenue growth was based on the average growth rate of total

subscription in the industry over the past five years. Historically, total subscription has grown at a

faster rate than TSTT revenue growth hence, this is a very optimistic projection.

Gross profit margin is projected to be maintained at 83%. Total operating expense is projected to

decline by approximately 38% in 2020 due to the staff reorganization exercise and then increase

by 2.6% thereafter in line with revenue growth. Capital expenditure is projected to be

approximately TTD 3.5 billion over the next 10 years due to the evolving nature of the industry.

These projections also assume that TSTT will not take on any additional debt after the USD 400

million offering. We also assume that TSTT will payout 50% of PAT in dividend annually.

The projected cash flow data above was created from these assumptions. The data shows that

although TSTT would be cash flow positive for the first 7 years of the life of the bond, when

principal payment become due they are likely to struggle to make payments. This leads us to

believe that the debt will most likely need to be refinanced or they may seek assistance from the

Government of Trinidad and Tobago to repay.

Competitive Strengths

TSTT is a strong market player in the highly competitive telecommunications industry.

TSTT recently completed performance enhancement measures is expected to reduce cost

and increase accountability.

TSTT recently made significant investments in their network.

The Government of Trinidad & Tobago has an indirect controlling interest in TSTT and

could provide financial support if needed.

6.2% 7.0%4.8%

-2.5% -2.3%

2.7%

-2.0%-4.0%

1.9%

-8.9%

2014 2015 2016 2017 2018

TSTT Revenue Growth Vs. Industry Subsription Growth

Industry Subscription Growth Rate TSTT Revenue Growth

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Risk Factors

TSTT faces significant competition in each of the segments of the market in which they

operate, and competitive pressures could have a material adverse impact on their business.

The market is characterized by rapid technological change, which could render their

products and services obsolete and cause them to make substantial expenditures to replace

their products and services.

High levels of penetration of mobile phone services in their market could inhibit future

growth.

Their operations are subject to various operating risks including breakdowns of equipment,

interruption of supplies and services and natural disasters, and resulting losses may cause

a material adverse impact on their business and operations.

Strikes, work stoppages or labor unrest by their employees or by the employees of their

suppliers or contractors, as well as potential shortages of skilled personnel, could adversely

affect their results of operations and business.

Certain of the rights of their minority shareholder, C&W West Indies, have been suspended

pursuant to a Divestment Suspension Agreement which could have an adverse effect on

their business and financial condition.

Fluctuations in foreign currency exchange rates could have an adverse effect on their

financial performance.

Their dividend policy could have an adverse effect on their financial health as they are

required to pay at least 50% of their profit in dividend.

A downgrade in Trinidad and Tobago’s credit rating may lead to a downgrade in their

credit rating.

TSTT generates the majority of its’ revenue in TTD while 75% of the issue will be in USD.

TSTT will need Government assistance to repay in USD. Given the uncertainty

surrounding the decline in Trinidad and Tobago’s foreign reserves there may be a level of

risk associated.

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Valuation

Model 1

9.62% Trinidad Telecommunications Industry Risk Premium

3.48%

8.875% Risk premium for b2 rated paper

Virizon 2028 Bond - Baa2 Rating

2.89%

Proposed pricing

3.25%

Fair Value Offer Yield

Model 2

9.54% Trinidad Corporate Fixed Income Risk Premium

3.43%

8.875% Risk premium for b2 rated paper

Virizon 2028 Bond - Baa2 Rating

2.89%

Proposed pricing

3.25%

Fair Value Offer Yield

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Valuation Methodology

The fair valuation of the TSTT bond is based on 2 built-up valuation models. We started with a

US corporate bond in the telecommunications industry with a similar tenor to the average life of

the TSTT bond (Verizon 2028 bond). Given that the Verizon 2028 bond has a credit rating of Baa2

we added a risk premium for single b rated paper. For model 1 we added a risk premium for the

telecommunications industry in Trinidad and Tobago. Whereas, for model 2 we added a risk

premium for Trinidad corporate fixed income paper. Model 1 gives a fair value yield of 9.62%,

while model 2 gives a fair value yield of 9.54%.

Recommendation

Our models gave a fair value yield of 9.58%. A 3% margin of error was applied to the target yield

to give a fair value range of 9.29% - 9.87%. At the current proposed yield of 8.875% for the USD

portion of the offer we recommend the TSTT bond with an UNDERWEIGHT rating.

This UNDERWEIGHT rating is given on the following basis:

TSTT faces strong competition in all the segments in which it operates and their market

share in most of these segments have been on the decline.

Given the high penetration rates in the sector and the small geographical market in which

they operate, TSTT’s revenue will be constrained.

TSTT may not be able to generate the cash flows to make principal payments without

assistance form the Government of Trinidad and Tobago or through refinancing.

Fair Value Range Price Weight

Model 1 9.62% 50%

Model 2 9.54% 50%

Weighted Price 9.58%

3% Under 9.29%

3% Over 9.87%

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APPENDIX

IMPORTANT DISCLOSURES

Abstract— as a part of our new portfolio strategy we are recommending strict adherence to the

following portfolio allocation definitions/recommendations.

PLEASE NOTE THAT NO INDIVIDUAL ASSET IN YOUR PORTFOLIO SHOULD HAVE

A WEIGHTING GREATER THAN 10% UNLESS OTHERWISE RECOMMENDED BY YOUR

PORTFOLIO MANAGER/ INVESTMENT ADVISOR OR A SPECIFIC JMMB RESEARCH

REPORT. CONSEQUENTLY, THE FOLLOWING DEFINITIONS ARE PROVIDED FOR

CLARITY.

HOLD/MARKETWEIGHT— This rating is based on a flat capital appreciation (0% to 3%) of

a stock relative to the current market price.

BUY/OVERWEIGHT— This rating is based on the capital appreciation of a stock above 3% of

the current market price.

UNDERWEIGHT— This rating is based on the negative price movement of a stock (less than

0%) relative to the current market price.

Valuation Report

Valuation Report

Telecommunications Services of Trinidad and … Research...broadband services via its Worldwide...

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