Wednesday 28 March 2012

Telecommunication - Neutral - 28 March 2012


 We are maintaining our NEUTRAL view on  the Telecommunication sector. While the sector risks (i.e. risk of heightened competition, potential inadequate LTE spectrum allocation and spectrum refarming) continue to persist, it will provide a great opportunity to the winners at the end of  the battle and increase their competitive advantages. Competition in the home broadband segment is expected to heat up in 1H12 when Maxis launch its FTTH plan in  full scale. We maintain our OUTPERFORM calls on 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 on the sector, we believe the sector’s healthy EBITDA, decent dividend and strong operating cash flow will provide a much needed defensiveness required during the volatile market.  

FY11 results snapshot. All the local telco players have posted fairly strong FY11’s results that were either within or above the street and  our expectations. Going  forward,  most  of  the incumbents are expecting to record a mid single digit annual revenue growth in FY12 while Digi appears to be more optimistic by targeting a  mid-to-high single digit revenue growth. EBITDA margin-wise, all the telco players are expecting to record either a flat or lower margin due mainly to the increase in operating costs and rising  contribution from the data segment, where the margin is lower as compared to the traditional voice segment. 

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

Industry outlook. We expect the incumbents to grow by mid-to-high single digit in 2012 with the data segment continuing to remain in the driver seat. Smartphone penetration remains low at approximately 20%, which suggests more room to grow for the data segment. 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 home broadband segment. TM signed a 10-year collaboration agreement with Maxis in December 2010 to allow the latter’s offering of FTTH via its high-speed broadband network.  Maxis has started the launch 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. Should Maxis tie up with Astro to ride with the latter’s IPTV content network, we believe it will provide a head-tohead competition to TM’s UniFi. In addition, the  ability of Maxis’ FTTH service to ride with the current UniFi set-up box may shorten Maxis’ gestation period here. 

Foreign shareholding stands at all-time high. Maxis, Axiata and TM’s foreign shareholdings were at 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 lower foreign shareholding was mainly due to the tight liquidity of the stock despite the company having completed a share split scheme recently. The high foreign shareholdings in the industry  in general meanwhile suggest that the local telecommunication industry actually has a strong defensiveness advantage in the volatile market. 

Bumper dividend payout. All the telco players have declared FY11 dividends that are within or 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 payout ratio of 65% (from a minimum of 30% previously) while Maxis and Digi intend to maintain their payouts at a minimum 40.0 sen and 17.5 sen dividend respectively. TM on the other hand is leaving its dividend policy (RM700m or 90% of normalised net profits, whichever is higher) unchanged. Still, we are of the view that the company could potentially reward its shareholders with more dividends given its strong retained earnings of more than RM1.8b post its recent proposed capital repayment. We are expecting Maxis, Axiata, Digi and TM to declare 40.0 sen, 19.0 sen, 17.6 sen and 49.6 sen in dividends respectively for FY12.

Source: Kenanga

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