Thursday 23 February 2012

TELCO (NEUTRAL) Sector News Flash: Walking Down The Aisle


THE BUZZ
Star Business reported that M&A talks have begun in the telecommunications space. It highlighted industry sources that one of the more active players pursuing a M&A exercise was the YTL group which has approached Asiaspace and Green Packet.  Asiaspace’s Chairman indicated that “consolidation was the most logical thing to do as capex is so high for the industry”.

OUR TAKE
The fight for survival. The developments do not surprise us as we had highlighted in the past that a consolidation among the smaller telcos is a foregone conclusion, as most lack the scale, operational track record and financial resources to compete with the incumbents. This is also consistent with the government’s call for the sharing of network resources in minimizing duplication, both on active/passive infrastructure where various partnerships have already been forged among the incumbents and the smaller telcos.

4 WiMAX players eyed. We expect the consolidation theme to be strongest within the 4 smaller companies – YTL, Communications, P1 Networks, Redtone and  Asiasapace –awarded the 2.6GHz spectrum as this is a condition implicit in the provisional allotment of the licences to the operators last year. Of the four, P1 was the earliest to roll out its WiMax service on the previously awarded 2.3GHz spectrum in 2008. YTL launched its wireless broadband service in Nov 2010, while Redtone and Asiaspace only managed selective rollouts with patchy services reported. We see greatest upside from the merger between YTL Communications and P1 as both have a decent base of subscribers as well as command decent network coverage with potential for revenue and cost synergies.

NEUTRAL on the sector. We are retaining our sector call given that valuations are not attractive when stacked against regional comparables, albeit the local sector is supported by the decent dividend yields of the telcos. Our top pick in the sector remains AXIATA (BUY, FV: RM5.60) and TM (BUY, FV: RM5.50), given their stronger earnings outlook and potential for active capital management. We maintain our NEUTRAL ratings on both Digi and Maxis with  Fair  Values of RM4.00 and RM5.10 respectively as the recent share price re-ratings of both stocks have probably factored in various positive operational and dividend themes for now. Digi and Maxis trades at FY13 PERs of 18-20x, which are at a premium to those of regional mobile operators.   


Source: OSK188

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