Bursa Malaysia Stock Watch
Telecommunications Sector: Riding On The Data Traffic Wave
kltrader
Publish date: Sat, 30 Jan 2010, 08:27 PM
kltrader
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? Key investment themes. We see the following key investment themes for the telecommunications
sector this year:
1) Data traffic ? the next wave of growth. While we expect voice revenue to see slower growth ahead, we are more optimistic with respect to broadband and data revenue. Factors such as an unusually large gap between the number of internet users in Malaysia and broadband penetration, a young demographic profile that is internet and tech savvy, an increasing range and choice of handsets and smartphones and rising popularity of social networking services all lead us to believe that the non-voice revenue segment is poised for significant growth ahead.
2) Strong cash flows, healthy balance sheets and well articulated dividend policies lend visibility to attractive yields. Cash flows for both Digi and Maxis remain strong while we expect TM?s cash flows would be sufficient to cover its capex requirements. Based on their respective dividend policies, we project FY10 net yields of between 4.8% and 6.3%. This is relatively more attractive as compared to the average net yield of 2.4% for the top 10 stocks in the FBM KLCI (within RHBRI?s coverage) and would help lend support to share prices, in our view.
3) Capital management activities still on the cards. We believe capital management would be a recurring theme for the sector this year. Digi remains committed to moving towards a more efficient balance sheet while the management of Maxis has reassured investors that the balance sheet would not be left idle. As for TM, after the generous capital repayment last year, management has yet to make any firm commitments with respect to capital management initiatives. However, we believe the door is still open as TM has the capacity to pay out cash in excess of the minimum RM700m dividends.
? Risk. The key risk is still, in our view, competition. Despite the number of new operators that have come into the market, we think that the direction of tariffs would still depend heavily on the pricing behaviour of the incumbent mobile operators. More importantly, while we expect tariffs to continue to remain under pressure due to competition, we do not expect irrational pricing to set-in.
? Recommendation. We are maintaining our Overweight stance on the telecommunications space. The sector has underperformed the benchmark FBM KLCI over the last 1-2 years, held back largely due to the market?s focus on the maturity of the voice segment of the industry, while under-appreciating the expected growth of the non-voice segment, in our view. Generally, we see the sector offering a broad appeal to investors of various risk appetites. For investors with higher risk appetites, Axiata (Outperform, FV=RM3.85) offers investors strong earnings growth and exposure to a recovery in emerging markets, where mobile penetration still remains relatively low. We believe a new economic cycle has begun and Axiata would be a major beneficiary, in our view. At the extreme, we see TM (Outperform, FV=RM3.55) maintaining its minimum dividend commitment of RM700m p.a. (or 6.3% net yield) and this should appeal to the risk adverse. For a balance, we like Digi (Outperform, FV=RM24.00) and Maxis (Outperform, FV=RM6.30) as both offer investors decent earnings growth and yields. We see further upside to yields as the balance sheets of these companies would appear to be rather underleveraged by end-2010.
By RHBINVEST
Analyst: David Chong, CFA
sector this year:
1) Data traffic ? the next wave of growth. While we expect voice revenue to see slower growth ahead, we are more optimistic with respect to broadband and data revenue. Factors such as an unusually large gap between the number of internet users in Malaysia and broadband penetration, a young demographic profile that is internet and tech savvy, an increasing range and choice of handsets and smartphones and rising popularity of social networking services all lead us to believe that the non-voice revenue segment is poised for significant growth ahead.
2) Strong cash flows, healthy balance sheets and well articulated dividend policies lend visibility to attractive yields. Cash flows for both Digi and Maxis remain strong while we expect TM?s cash flows would be sufficient to cover its capex requirements. Based on their respective dividend policies, we project FY10 net yields of between 4.8% and 6.3%. This is relatively more attractive as compared to the average net yield of 2.4% for the top 10 stocks in the FBM KLCI (within RHBRI?s coverage) and would help lend support to share prices, in our view.
3) Capital management activities still on the cards. We believe capital management would be a recurring theme for the sector this year. Digi remains committed to moving towards a more efficient balance sheet while the management of Maxis has reassured investors that the balance sheet would not be left idle. As for TM, after the generous capital repayment last year, management has yet to make any firm commitments with respect to capital management initiatives. However, we believe the door is still open as TM has the capacity to pay out cash in excess of the minimum RM700m dividends.
? Risk. The key risk is still, in our view, competition. Despite the number of new operators that have come into the market, we think that the direction of tariffs would still depend heavily on the pricing behaviour of the incumbent mobile operators. More importantly, while we expect tariffs to continue to remain under pressure due to competition, we do not expect irrational pricing to set-in.
? Recommendation. We are maintaining our Overweight stance on the telecommunications space. The sector has underperformed the benchmark FBM KLCI over the last 1-2 years, held back largely due to the market?s focus on the maturity of the voice segment of the industry, while under-appreciating the expected growth of the non-voice segment, in our view. Generally, we see the sector offering a broad appeal to investors of various risk appetites. For investors with higher risk appetites, Axiata (Outperform, FV=RM3.85) offers investors strong earnings growth and exposure to a recovery in emerging markets, where mobile penetration still remains relatively low. We believe a new economic cycle has begun and Axiata would be a major beneficiary, in our view. At the extreme, we see TM (Outperform, FV=RM3.55) maintaining its minimum dividend commitment of RM700m p.a. (or 6.3% net yield) and this should appeal to the risk adverse. For a balance, we like Digi (Outperform, FV=RM24.00) and Maxis (Outperform, FV=RM6.30) as both offer investors decent earnings growth and yields. We see further upside to yields as the balance sheets of these companies would appear to be rather underleveraged by end-2010.
By RHBINVEST
Analyst: David Chong, CFA
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