Staying Connected  returns and pays  tribute to our Top Picks  for  2014.We believe 2015 will be another stock-picking year for the telcos laced with tactical buying  and selling opportunities,  against the backdrop of structural themes and regulatory developments in  a  few markets. Our key OVERWEIGHT telco markets are Indonesia and Thailand,  with our top regional picks being Axiata, M1, DTAC and Telkom. 

Redialling 2014. The ASEAN-4 telcos (and our regional 17 telco stocksuniverse)  closed  2014  on  a  heartening  note  on  average  –  12  postedpositive share price returns. The mean return was a commendable 19% (28% if losers are excluded). Our top BUY ideas – Digi, Telekomunikasi Indonesia  (Telkom), Sarana Menara Nusantara, M1 and Time  dotCom fared relatively well,  outperforming  their  underlying benchmark indices and  boasting returns  of >10%.  Our top  SELL,  Maxis,  was  the second worst-performing  telco  for  the  year  behind  XL  Axiata.  Indosat,  which had disappointed for the longest time, saw its claim to fame with a 16% single  month  gain  in  Dec  2014,  albeit  not  enough  to  offset  losses  it succumbed to in the early part of the year.    

Tower  companies  (towercos)  scaling  new  heights.  The  towercosdominated  the  upper  quartile  of  share  price  returns.  The  two  biggest independent  tower  operators (ITO)  in  Indonesia,  Tower  Bersama  and Sarana  Menara  Nusantara,  posted  stellar  gains  of  67%  and  51% respectively,  outperforming  the  JCI  by  a  staggering  29-45%.  Our  top small-cap  pick  in  Malaysia,  OCK,  which  has  a  relatively  miniscule towerco business,  also chalked up a respectable gain of 50%  in 2014. The attraction of towercos lies in their cash-generative business modelsand visible longer-term earnings. 

Strategy. A stock-picking strategy remains key in 2015, in our view. On top  of  structural  issues,  regulatory  developments  will  play  a  central theme in  driving  the  performance of  the  ASEAN-4 telcos. This should present tactical buying  and selling  opportunities for investors in  a  few markets. Some developments to look out for: i) Thailand‟s  4G spectrum auctions (3Q15),  ii) Malaysia‟s  goods and services tax (GST)/spectrum re-farming  (2Q/2H15),  iii)  Singapore‟s  new  mobile  licence  potential awards, and iv) Indonesia‟s new 4G licence issuance.

Malaysia (NEUTRAL)

Telekom  Malaysia  (TM)  (T  MK,  NEUTRAL,  TP:  MYR7.00).  The  company  was awarded  a  contract  to  construct  a  new  submarine  cable  system  known  as  the 1Malaysia People’s Cable System (SKR1M) by the Malaysian Communications and Multimedia  Commission  (MCMC).  The  cable  system  is  part  of  the  Government‟s initiative to increase the capacity of high-speed broadband (HSBB) and to link Westand  East  Malaysia.  SKR1M  spans  approximately  3,500km.  The  system‟s  initial capacity of  four  terabit per second (Tbps)  is designed to provide upgradeable and transmission facilities by adopting 100  gigabit per second (Gbps)  technology  with a projected commencing date by mid-2017. (Bursa Announcement, 30 Dec)

Comment:  We  understand  the  Government  will  allocate  MYR400m  from  the Universal  Service  Provisioning  (USP)  fund  for  SKR1M  provided  for  under  Budget 2014,  with  TM  forking  out  an  equivalent  sum  under  a  private  public  partnership (PPP) initiative. TM should have no problem meeting its commitment  given its cash hoard  of  over  MYR1.6bn.  We  make  no  changes  to  our  forecasts  and  NEUTRAL rating on the stock as the cable is scheduled to be operational only in 2017. Axiata  (AXIATA  MK,  NEUTRAL,  TP:  MYR7.20).  The  group  has  entered  into  aglobal framework arrangement with several vendors,  including Ericsson  (ERIC US, NR)  and  Huawei  (2502  CH,  NR).  The  agreements  will  establish  a  streamlined procurement  platform  which  will  realise  business  efficiencies  through  cash  flow improvement and  timely purchasing. This enables  Axiata to leverage on its volume, 
across  five  countries  in  the  region  via  group  pricing  arrangements  with  expected savings of USD100m over a 3-year period. (TeleGeography, 17 Dec)

Comment: We view the development positively given the multi-market environment in  which  the  group  operates  and  following  the  centralisation  of  its  procurement process.  This  should  translate  into  greater  cost  and  capex  synergies.  While  the cost-savings could potentially raise Axiata’s core earnings by some 4% for FY15-16, we keep our forecasts unchanged for now.

Singapore (NEUTRAL)

Telstra  (TLS  AU,  NR)  and  Optus,  a  wholly-owned  subsidiary  of  SingTel  (ST  SP, NEUTRAL,  TP:  SGD3.93),  are  ramping  up  commercial  4G  mobile  services  that utilise  the 700  megahertz (MHz)   electronic spectrum acquired from  the Australian Government  for  AUD2bn  in  2013,  having  spent  AUD1.3bn  and  AUD649m respectively  in May 2013 at a government auction.  More than a million customers will  soon get access to mobile broadband speeds rarely seen outside of fixed-line services. Optus corporate and regulatory affairs vice-president David Epstein said the telco will  switch on 270 sites throughout metropolitan and regional centres from New Year's Day. It plans to cover 90% of the Australian population by April. (Sydney Morning Herald, 2 Jan)

Singapore  will  be  one  of  the  first  few  in  the  world  to  have  next-generation  4G network with M1 (M1 SP, BUY, TP: SGD4.40) being the first to launch it nationwide. Customers  with  devices  that  support  4G+  or  LTE-A  will  be  able  to  access downloads  of  between 43  megabits per second (Mbps)  and 115Mbps  at no extra charge.  In 2012, M1 launched South-East Asia's first nationwide 4G network with download speeds of  up to 75Mbps, and further enhanced its network to 150Mbps nationwide earlier this year. (The Straits Times, 2 Dec)

Comment:  The  improvement  in  the  LTE  device  eco-system  should  help  drive stronger  data  uptake  on  tiered  plans,  allowing  M1  to  better  monetise  data  going forward.

Optus  announced an entry-level unlimited data cable broadband bundle, which will be  delivered  via  its  hybrid  fibre-coaxial  (HFC)  cable  network.  Recently-appointed chief executive  Mr Allen Lew said that reinvigorating the stagnant fixed-broadband business  was  a  key  priority  in  the  new  year.  Optus‟  fixed  broadband  businesssubscriber base  consists  of  1m  customers, growing by  only 0.1%  QoQ.  (Business Spectator, 8 Dec)

Indonesia

Indosat  (ISAT  IJ, BUY, TP: IDR4,590).  The company  introduced its  4G service  in selected  locations.  This  follows  similar  launches  by  Telkom  (TLKM  IJ,  BUY,  TP: IDR3,200),  and  XL  Axiata  (EXCL  IJ,  BUY,  TP:  IDR6,280).  It  is  targeting  900,000 
post-paid customers on 4G. The telco hopes to grow its subscriber base from 54.2mto  60m  by  end-2015,  with  around  50%  of  its  base  as  potential  4G  customers. Indosat expects  the Government to open  up  the 1,800MHz frequency in 2015  for 4G,  thereby  potentially  higher  bandwidth  and  throughput  for  4G  devices.  (Jakarta Post, 24 Dec)

Telkom.  The company  will take the lead in a USD24bn drive to expand Indonesia's broadband capacity over the next five years as the Government seeks to improve Internet access in Indonesia. Only 12% and 5% of Indonesia's total population have access to mobile broadband and fixed-line broadband respectively.  Faster Internet and  better  access  would  boost  Indonesia‟s  nascent  e-commerce  market,  which could more than double to USD25bn by 2016. (Reuters, 11 Dec)

Tower  Bersama  (TBIG  IJ,  NEUTRAL,  TP:  IDR8,600).  The  company  plans  to spend  IDR2trn  (approximately  USD161m)  in  its  telecom  tower  base  expansion  in 2015.  Tower Bersama  will deploy 1,500 to 2,000 new telecoms towers next year, investing around IDR1bn per tower, according to its  finance director Helmy Yusman Santoso.  “We  allocate  around  IDR2trn  from  our  internal  cash  for  organic  growth next year”, Santoso said.  Tower Bersama  ended September with a total of 11,686 telecommunications towers. “Over the last two to three ye ars, we have seen more organic growth than non-organic. Next year alone, we estimate that we will see at 
least the same growth as this year”, said  Tower Bersama president director Herman Setya Budi (Telecompaper, 30 Jan)

Comment: We note that Tower Bersama added 1,757 towers in 9M14 or a run rate of 585 per quarter while organic tenancy growth totalled 2,430. While the acquisition of Mitratel will increase its tower sites to over 15,000 from 11,986 as  at 3Q14, we expect its tower tenancy  ratio  to decline to 1.5-1.6x in FY15-16  from 1.7x in FY14due to the lower tenancy at Mitratel.

Thailand (OVERWEIGHT)

Total Access Communication  (DTAC  TB, BUY,  TP: THB132.92).  The company signed a  memorandum of understanding (MoU)  with CAT Telecom to promote the sharing  of  network  infrastructure  and  has  held  discussions  on  the  transfer  of  its unused  25MHz  of  the  1,800MHz  spectrum  to  the  National  Broadcasting  and Telecommunications Commission (NBTC) ahead of the auction. (The Nation, 2 Dec)The  NBTC  plans  to  conclude  the  1,800MHz  auction  within  seven  months  of receiving the green light from the junta. (Bangkok Post, 16 Dec)Comment:  We  remain cautiously  optimistic on  the auction timeline and do not  rule out  further  delays  given  the  protracted  restructuring  efforts  at  the  state-owned enterprises (SOE).

Advanced  Info  Service  (ADVANC  TB,  BUY,  TP:  THB278.94),  DTAC  and  True (TRUE  TB,  NR)  have  vowed  to  cooperate  on  developing  Thailand’s  4G infrastructure. The companies have called on the Government to push ahead for the 4G spectrum auctions, slated for Jul/Aug 2015, which will pave the way for a full suite 4G services to be offered.  In addition to the 900/1,800MHz frequencies, the telcos  have  urged  policymakers  to  also  award  the  2.3GHz,  2.6GHz  and  700MHz spectrum (Bangkok Post, 24 Dec)

Source: RHB