Thursday 20 December 2012

Telecommunication - 2013 – A year of LTE services rollout


We are maintaining our NEUTRAL view on the Telecommunication sector. Following by the award of 2.6GHz spectrum, celcos will likely to unveil their respective LTE services roadmaps in the coming weeks or months, where we believe online video service could be a key focus, even as the local 4G eco-system is not well prepared yet. Data traffic is expected to rise tremendously when the 4G eco-system is in place and this will ultimately benefits the network backhaul providers  (i.e. Telekom Malaysia (“TM”) and Time dotCom) in the long run due to the higher data offloading demand. As for the access pricing review, we are having lesser concerns for now as compared to a month ago after attending the briefing conducted by MCMC  recently. TM (OP, TP: RM6.50) remains our top pick in the telco sector due to its strong dividend yield, solid presence in the FTTH market and the lesser competition seen in  its wholesale and fixed-line segment. For Axiata (MP, TP: RM6.53), meanwhile, its outlook has improved but the prolonged regulation issues in some key operating companies coupled with a strong Ringgit may continue to put barriers in its operations going forward. Maxis (MP, TP: RM7.00) earnings outlook remains sluggish despite the regulation cloud being removed while Digi (MP, TP: RM4.95) outlook continued to be lukewarm as a result of lacking of any near-term catalysts. 

3QFY12 results snapshot.  Local telco players posted a mixed 3QCY12 results. Axiata is the only incumbent which recorded a better-than-expected result due to the higher turnover at its key operating companies and higher associates contributions. Digi and TM’s results, meanwhile, were within expectations while Maxis continues to fail to deliver due to its sluggish revenue growth and EBITDA margin compression as a result of higher device sales. 

Lesser concerns on the access pricing review. MCMC has lately issued the finding of the public inquiry which interconnection rates remain large unchanged as compared to the earlier plan while strip off the proposed regulated plan on wholesale HSBB rates, Fixed Access Services and Bitsream services. All the telco players will then have a second opportunity to review the access pricing scheme again before the authority decides on the final mandated the prices in 1QCY13. The key rationales to conduct an access pricing review are  to enhance telcos efficiency and lower interconnection rate, thus benefit the subscribers. Nevertheless, this does not mean that the authority has an intention to penalize the telco players. In fact, the mandated prices will likely to be concluded at neutral to slightly negative from telco perspective, according to MCMC. 

2G and 3G spectrum's re-farming could come in latter. While there is a need to re-farm the spectrum to enhance the efficiency by all telcos, the re-farming exercise is likely to come in latter.Reasons being are 1) the entire spectrum group has yet to expire although some of the individual company spectrums may expire. This means, for example, the 900MHz spectrum re-farming will only take place after January 2015 despite Maxis’ 900MHz expiring soon at end-2012; and 2) the refarming exercise will only commence should ALL the subscribers (under the particular spectrum, i.e. 2G) migrated to other spectrums (i.e. 3G platform).          

Award of the 2.6GHz spectrum.  MCMC has finally announced the allocation of the much anticipated 2.6 GHz spectrum band to eight players. While the sequence of the spectrum bandwidth remains vague at this juncture, we expect the spectrum awardees to further collaborate with their bandwidth neighbours to further enhance their spectrum efficiency. All the mobile operators had indicated earlier that their networks were ready to deploy LTE services, of which Celcom and Maxis have committed to roll out 4G services over the next three to six months in the Klang Valley, Penang, and Johor. We believe the remaining incumbents will unveil their respective 4G services soon.  

Optimal capital structure remains a wild card to fuel capital management. While all the telco incumbents are set to record dividend yields of 3.7%-6.2% in FY13, we do not discount the possibility that the industry players could potentially reward their shareholders further via optimizing their capital structure. Based on our observation, TM tends to raise the highest cash/share of 46.4 sen followed by Axiata (37.0 sen), Maxis (27.4 sen) and Digi (9.6 sen) should they opt to achieve their own respective maximum optimal capital structure.

Source: Kenanga 

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