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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