Telecommunication - OVERWEIGHT - 21 June 2012

kiasutrader

Publish date: Thu, 21 Jun 2012, 05:46 PM

We are raising our Telecommunication sector to an OVERWEIGHT after raising the incumbents' target prices by rolling over our valuation year to FY13. Telekom Malaysia ('TM') continues to be our top pick in the telco sector due to its strong dividend yield, solid presence in the fibre-to-the-home ('FTTH') market and less competition seen in its wholesale and fixed-line segments. Meanwhile, Digi continues to remain our favourite pick in the mobile operator segment due to its consistent earnings, better corporate governance and its highest ROE in the industry. We have raised our TM and Digi target prices to RM6.36 and RM4.68 (from RM5.65 and RM4.40 previously), respectively, after moving forward the valuation base year to FY13 with a slightly higher targeted EV/forward EBITDA (based on unchanged +2x standard deviation). Similarly, our Maxis and Axiata target prices have also been raised to RM6.76 and RM5.95 (from RM6.00 and RM5.52 previously), respectively, although their ratings stay at MARKET PERFORM each for now. We expect the industry growth momentum to continue judging from the fairly strong 1Q12 results performance despite 1Q being a seasonally slow quarter. On top of that, the current dividend yield thematic play in the sector could continue to spill over to the 2H given that investors tend to seek decent dividend yield stocks during a volatile market. Key events to watch during the 2H include 1) the final allocation of the LTE spectrum, 2) the DTTB plan conclusion and 3) prolong collaborations among the industry players.

1QFY12 results snapshot. All the local telco players posted fairly strong 1Q12 results that came in either within or above the street and our expectations. TM posted the most outstanding 1Q results among its peers, underpinned by higher contribution from all its business segments. Digi, on the other hand, has continued its capital management initiative to propose another capital distribution of RM495m while Axiata's 1Q result was mainly driven by higher contribution from Celcom despite some hiccups in its overseas ventures. Meanwhile, Maxis' 1Q result was relatively flat on a year-on-year basis, but it has started to record negative net-adds in its subscribers and continued to lose market share to its peers.

2H12 industry outlook. While competition is intensifying all the time, we expect the industry's growth momentum to continue judging from the fairly strong 1Q12 results performance. On top of that, the industry players may also potentially look into the sale and leasebacks of their respective telecom towers in line with the global industry trend. This move if materialises may further unlock shareholders value in our view. Press reports have said that each telecom tower may cost RM250k-RM300k to build or acquire. We understand that Maxis, Celcom and Digi have more than 12k, 9k and 5k 2G and 3G base station sites respectively in CY11.

Could digital terrestrial television broadcasting ('DTTB') provide a new source of income to telco players? The submission of a request for proposal ('RFP') for the DTTB system is targeted to be due on July 25 according to MCMC. The winner of the tender will build and operate the infrastructure and network facilities for DTT services where all broadcasters can ride on the infrastructure to transmit their TV programmes. It was reported earlier that the entire infrastructure, including the set-top boxes which are needed for digital TV, was estimated to cost RM1.0b. While there is no detail business plan unveiled at this juncture, we believe the plan could provide an additional income source to the successful bidder.

Dividend yield play likely to continue in 2H12. The telco sector has had a very strong rally since the beginning of the year with an average total return of 13.9% for the YTD as of 20 June. In view of the increasing volatility in the regional stock markets, Malaysia will likely continue to be a safe haven and defensive shelter for investors due to its stable economy. We believe that the local telco sector will continue to be under the investor's limelight in the 2H given its decent dividend yield and strong operating cash flow generation capability. Despite having rallied, the sector is still able to provide a relatively robust dividend yield (above that of the benchmark index yield of 3.65%). Digi currently offers the highest dividend yield of 7.0% in FY13 based on our estimate, followed by Maxis (6.3%) and TM (3.6%).

Source: Kenanga

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