Telecommunication - Dividend yield play remains the focus

We are maintaining our OVERWEIGHT rating on the Telecommunication sector. The current sector dividend yield theme play is likely  to continue during the 4Q given that investors will likely continue to seek decent dividend yield stocks in a volatile market. Telekom Malaysia (“TM”) continues to remain our top pick in the telco sector due to its strong dividend yield, solid presence in the fibre-to-the-home (“FTTH”) market and 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 it having the highest ROE in the industry. We are maintaining our OUTPERFORM calls for both TM and Digi with unchanged target prices of RM6.45 and RM5.20 respectively. Similarly, our Maxis and Axiata’s MARKET PERFORM ratings remain unchanged with target prices at RM7.35 and RM6.33 respectively. The key events to watch in the 4Q include 1) the final allocation of the LTE spectrum, 2) the joint FTTH plans offered by Astro and Maxis  and 3) prolonged collaborations among the industry players. 

2QFY12 results snapshot. All the local telco players posted fairly strong 2Q12 results that were either within or above the street and our expectations. Both TM and Axiata’s 2Q12 results beat their consensus estimates as a result of higher turnovers and better than expected margins. Digi’s results came in within expectations, underpinned by its resilient voice and data revenue. Maxis’ 2Q12 results, on the other hand, were below expectations as a result of a network assets write-off. Dividend-wise, all the telco company payouts in 2Q12 was in line with expectations.

4Q12 industry outlook.  While competition is intensifying all the time, we  expect the industry’s growth momentum to continue judging from the fairly strong 1H12 results performance. Competition in the FTTH segment is expected to escalate with both Maxis and Astro aiming to launch their joint home broadband & IPTV packages in 4Q12. Nonetheless, we believe TM is able to defend its FTTH market share due to its first-mover  advantage and more importantly, its ultimate ownership of the network. On top of that, we also expect MCMC to conclude the 2.6GHz spectrum Apparatus Assignment by year-end. For the upcoming 2013 budget, we do not expect any goodies, apart from the current RM500 tax relief for broadband subscription fee, from the government for the telco sector. 

IPTV battle is the key. The recent partnership between Maxis and Astro may provide a real competition to TM’s Unifi in CY13 should the joint parties offer its home broadband services at a competitive price with rich contents. While the details of the joint packages have yet to be unveiled, we believe that the price will likely be set at around RM250/month, which is similar to that currently being offered by Time dotCom and Astro in their joint packages. We believe the real battle is likely come from the IPTV segment rather than on broadband speed given that Maxis is riding on TM’s HSBB backhaul. Moving forward, we understand that TM intends to educate its subscribers and create more awareness on its HyppTV to lift its ARPU.

Dividend yield play likely to continue but watch out on the inflection point. The telco sector has had a very strong rally since the beginning of the year with an average total return of 29.4% YTD as opposed of 9.1% in FBMKLCI. 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. Thus, we believe the local telco sector will continue to be under the investors’ limelight given its decent dividend yield and strong operating cash flow generation capability. Both Digi and Maxis still have rooms for further yield compression in our view, despite their hefty YTD rallies. We reiterate our view that TM is likely to declare another capital initiative plan in FY12 given its healthier cash flow and lower capex trend. For the sector inflection point, we believe this will come in when the volatility of the market becomes lesser as a result of the improvement in the external factors (i.e. fewer concerns on Eurozone crisis, etc.) although the timing is hard to predict at this juncture.

Source: Kenanga