We are maintaining our NEUTRAL view on  the Telecommunication sector. While the sectorrisks (i.e. risk of heightened competition, potential inadequate LTE spectrum allocationand spectrum refarming) continue to persist, it will provide a great opportunityto the winners at the end of  the battleand increase their competitive advantages. Competition in the home broadbandsegment is expected to heat up in 1H12 when Maxis launch its FTTH plan in  full scale. We maintain our OUTPERFORM callson TM (TP: RM5.52); while keeping MARKET PERFORM calls on Digi (TP: RM4.15);Axiata (TP: RM5.30); and Maxis (TP: RM5.80). Despite having a NEUTRAL view onthe sector, we believe the sector's healthy EBITDA, decent dividend and strongoperating cash flow will provide a much needed defensiveness required during thevolatile market.  

FY11 resultssnapshot. All the local telco players have posted fairly strong FY11'sresults that were either within or above the street and  our expectations. Going  forward, most  of  the incumbents are expecting to record a midsingle digit annual revenue growth in FY12 while Digi appears to be moreoptimistic by targeting a  mid-to-highsingle digit revenue growth. EBITDA margin-wise, all the telco players areexpecting to record either a flat or lower margin due mainly to the increase inoperating costs and rising  contributionfrom the data segment, where the margin is lower as compared to the traditionalvoice segment. 

2012 industry trends.Post the FY11's results, we observe that the industry is heading towards thefollowing trends: 1) short-to-mid term margin compression as a result of highercontribution from the data segment; 2) aggressive marketing campaigns andpromotions seemed to have started to be reflected in higher MOU (minutes ofusage) but lower ARPM (average revenue per minute) since 3QCY11 and 3) a risein dividend payout. 

Industry outlook.We expect the incumbents to grow by mid-to-high single digit in 2012 with thedata segment continuing to remain in the driver seat. Smartphone penetrationremains low at approximately 20%, which suggests more room to grow for the datasegment. Furthermore, with more attractive data bundle packages, cheaper  smartphone devices and rising popularity of tablets,the growth prospect in the data segment remains bright. 

More heat in the homebroadband segment. TM signed a 10-year collaboration agreement with Maxisin December 2010 to allow the latter's offering of FTTH via its high-speedbroadband network.  Maxis has started thelaunch of its FTTH plan since 2HFY11 in selected areas (i.e. Klang Valley,Penang, and Johor Bahru) and is targeting a full scale launch in 1HFY12. ShouldMaxis tie up with Astro to ride with the latter's IPTV content network, webelieve it will provide a head-tohead competition to TM's UniFi. In addition,the  ability of Maxis' FTTH service toride with the current UniFi set-up box may shorten Maxis' gestation periodhere. 

Foreign shareholdingstands at all-time high. Maxis, Axiata and TM's foreign shareholdings wereat their all-time highs at 29.6%, 28.0% and 20.5% respectively as at end CY11.Digi on the other hand saw its foreign shareholdings at just 12.6% (ex.Telenor) vs 28% in early CY07. Its management is of the view that the lowerforeign shareholding was mainly due to the tight liquidity of the stock despitethe company having completed a share split scheme recently. The high foreignshareholdings in the industry  in generalmeanwhile suggest that the local telecommunication industry actually has astrong defensiveness advantage in the volatile market. 

Bumper dividendpayout. All the telco players have declared FY11 dividends that are withinor higher than the committed amount/ratio stated  in their respective dividend policies. Going forward,Axiata will declare its FY12 dividend based on a revised higher dividend payoutratio of 65% (from a minimum of 30% previously) while Maxis and Digi intend tomaintain their payouts at a minimum 40.0 sen and 17.5 sen dividendrespectively. TM on the other hand is leaving its dividend policy (RM700m or90% of normalised net profits, whichever is higher) unchanged. Still, we are ofthe view that the company could potentially reward its shareholders with more dividendsgiven its strong retained earnings of more than RM1.8b post its recent proposedcapital repayment. We are expecting Maxis, Axiata, Digi and TM to declare 40.0sen, 19.0 sen, 17.6 sen and 49.6 sen in dividends respectively for FY12.

Source: Kenanga