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Telco sector expected to remain resilient into 2010

KUALA LUMPUR: Telecommunication players and analysts have had a lot to talk about this year in the midst of a market still smarting from the impact of the global economic slowdown.

Despite the general gloom, local players saw brisk activity with the relisting of Maxis Bhd in a mega RM11.2 billion initial public offer (IPO), the entry of a number of new mobile virtual network operators (MVNOs) and intense price competition.

“Local telecommunication stocks have generally been quite resilient in terms of earnings and revenues despite the slowdown,” OSK Investment Research analyst Jeffrey Tan told The Edge Financial Daily.

“One of our favourite stocks for the year is Axiata, which remains our top pick going into 2010,” he said, adding that Axiata had a good regional story with a foot in 10 countries and good-performing assets in Indonesia, Sri Lanka and Bangladesh. 

Tan said overall, Axiata stocks saw good earnings momentum over the last two quarters of the year. “Its share price outperformed, given better underlying performance from its assets locally and overseas,” he said.

As for DiGi.Com Bhd, he said, its share price had performed in line with expectations throughout the year and this was reflected in its share price.

Tan added Maxis shares were only listed on Nov 19, which resulted in it “not having much of a track record as yet” despite its steady share price.

ECM Libra Investment Research analyst Lim Tee Yang held a differing view on Maxis’ shares, saying despite its recent listing, it was the best-performing of the 13 IPOs of the year.

“A retail investor would have gained 12% based on the closing price for Maxis on Dec 21 (RM5.38),” he said in an email response. “In contrast, eight IPOs are now trading below their listing prices with a few lower by as much as 30%-40%.”

Lim said DiGi’s stocks saw a relatively flat year given that it was in a “gestation phase” in rolling out its 3G network for broadband services, while Axiata saw a 30% gain in stock prices since its foreign operations saw a turnaround in 1Q09.

Meanwhile, TM’s share performance has been above expectations, gaining 31% since Jan 2, 2009. “If we include the 98 sen capital repayment paid in 2Q09, investors would have reaped 73% making it the largest capital gain in our coverage,” said Lim.

The general outlook for the sector is that short-term growth will be moderate as mobile penetration surpassed the 100% mark in 1Q09, with the onus to generate growth into 2010 on the wireless broadband sector.

According to the Malaysian Communications and Multimedia Commission (MCMC), mobile penetration hit 104.1% as at end-September 2009, and is projected to grow to 118% by end-2011 based on RHB Research’s numbers.

“Notwithstanding the high penetration rate, we believe there is still room for growth ahead, albeit at a slower three-year CAGR of 8.6%,” it said in a research note on Dec 15.

“We project mobile penetration rates to reach 117.7% by end-2011, supported by factors such as rising multiple SIM holders, favourable demographics structure (the youth segment makes up almost 50% of Malaysia’s population) and growth opportunities available in the under-served and suburban areas.”

RHB Research and ECM Libra expected the growth of telcos to ride on non-voice revenues from wireless broadband and data value-added services including mobile Internet, messaging and content services.

With regard to the entry of new MVNOs backed by industry giant Celcom (M) Bhd, XOX Com Sdn Bhd and Tune Talk Sdn Bhd, and how it would fare in 2010, OSK Research’s Tan said competition would intensify given the downward pressure on margins.

“We will see a price war on the prepaid side as the tariffs have not fallen enough compared to regional markets like India, Indonesia and Thailand,” he said.

Other MVNOs present in the market are DiGi-backed Happy and tycoon Tan Sri Vincent Tan’s embattled U Mobile, which saw two foreign partners pull out earlier this year.

Analysts also expect intensifying price competition and rush to meet the government’s 50% penetration target for broadband services by year-end.

The high-speed broadband (HSBB) project, which sees other players like YTL e-Solutions Bhd (YTLE), Green Packet’s Packet One Networks (M) Sdn Bhd,  REDtone International Bhd and Asiaspace Sdn Bhd entering the fray to compete with TM, which holds a monopoly on fixed broadband.

“Green Packet has shown respectable growth in its WiMAX subscriber base, almost doubling in a quarter to 100,000 in 3Q09,” said ECM Libra in a research note on Dec 21, 2009.

“It has set an ambitious target of 200,000 subscribers by year-end, which we believe is unlikely. The company needs 200,000 subscribers to break-even at Ebitda level.”

Analysts’ top picks for 2010 are Axiata, DiGi, Maxis and TM.

For the industry in general, RHB Research upgraded the telco sector to overweight from neutral with its top picks being DiGi, TM and Axiata.

The research house, upgrading DiGi to an outperform recommendation from market perform, said 2010 could yield bumper dividends for DiGi shareholders as in 2008 its management said the telco would reach “an optimal capital structure” in two to three years.

It liked TM for its HSBB project slated for launch by end-1Q10 and a potential disposal of 200 million shares in Axiata worth approximately RM600 million, while it thought Axiata’s stronger earnings growth was promising as was its possible in-country consolidation in Bangladesh.

Meanwhile, ECM Libra maintained its neutral call on the sector, with its top picks being Maxis, Axiata, DiGi and TM.

In a research note, it said while Maxis could expect “tepid growth” due to higher financing costs from its RM5 billion in new borrowings, its large market cap and strong free cash flow made it a favourite.

It said while Axiata had the best growth prospects, the stock price had run ahead of fundamentals, while DiGi remained a good dividend yield play despite a two to three-year lag for broadband contributions to become meaningful. TM with its high dividend yield was noted to have a strong advantage in broadband, to be further enhanced by its HSBB project.

OSK’s Tan said his top pick was Axiata for its capital gains and growth play, while he also liked Maxis and DiGi for their dividend yields and free cash flows.

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