We are reiterating our OVERWEIGHT view on the
Telecommunication sector. 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 the lesser 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 are
maintaining our TM and Digi target prices of RM6.36 and RM4.68, respectively, and
our OUTPERFORM recommendations for both telcos. Similarly, our Maxis and Axiata
ratings remain unchanged at MARKET PERFORM each with target prices of RM6.76
and RM5.95 respectively. We expect the industry growth momentum to continue
judging from the fairly strong 1Q12 results performance despite the 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, is 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 in the long run.
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 performance 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 investors’ 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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