Telecommunications sector
Maintain neutral: On June 10, Celcom Axiata, a wholly owned subsidiary of Axiata Group Bhd signed a memorandum of understanding with DiGi.Com Bhd to explore long-term network and infrastructure collaboration in Malaysia.

The collaboration will focus on three key areas ? operations and maintenance, transmission and site sharing, and radio access network. This follows a similar accord struck earlier between Robi (Axiata?s Bangladesh subsidiary) and Grameenphone (Telenor?s Bangladesh subsidiary).

Both operators expect the proposed active sharing model to generate significant operational and cost efficiencies by removing duplication of base station sites, addressing escalating rental fees, reducing utility bills and transmission costs, optimising deployment of base stations per area and redeploying equipment between redundant and new sites.

We are positive on this development for both Celcom and DiGi subject to signing a definitive agreement by year-end once both parties determine the long-term viability of the collaboration.

Reducing costs will help boost margins and generate bottom line growth, which has tapered off due to the saturating mobile market.

Also, Celcom and DiGi stand to close the gap with Maxis, which currently commands the highest ebitda (earnings before interest, tax, depreciation and amortisation) margins.

In addition to opex (operating expenditure) savings, we believe both parties may benefit from significant capex (capital expenditure) savings as well in terms of 3G rollout where 3G network coverage is still spotty. This will free up more cashflow for DiGi to sustain its high dividend payouts, as well as Axiata, which is expected to announce a more concrete dividend policy in 3QCY10 for its maiden dividend payouts in FY11.

The move from the current passive sharing practice in Malaysia involving components such as towers towards the proposed active sharing including antennas and base station equipment mirrors closely other developed markets such as Australia (Vodafone, Optus) and Sweden (Tele2, Telenor).

In these developed markets, operators form a joint-venture company to roll out 3G or 4G networks, thus reaping significant capex savings, while lowering the costs and risks to each operator.

It would not be surprising if Celcom and DiGi form a joint-venture company for their advanced network collaboration as was similarly done in developed markets.

Where Maxis Bhd stands in this picture remains unclear. Going by the trend seen in other developed markets, Maxis may possibly be left out cold.

As it is still early days, we make no changes to our earnings forecasts for now pending the signing of a definitive agreement. Axiata is our top pick given its strong growth prospects underpinned by high teens growth in XL and high single-digit growth in Celcom. ? ECM Libra Investment Research, June 11


This article appeared in The Edge Financial Daily, June 14, 2010.