Telecommunication - 4G LTE services rollout

We are raising our rating on the Telecommunication sector to an OVERWEIGHT. Mobile operators have launched their 4G LTE services with the key focus being on the wireless broadband segment in the urban areas in the initial stage. 4G revenue opportunities may be limited at first given operators has yet to specify their respective LTE strategies. Nevertheless, some of the uncertainties may be cleared up in mid-2013 when more 4G handsets (that are compatible with Malaysia’s 2.6GHz spectrum) would be available in the market. We expect the incumbents to launch their respective LTE bundle packages subsequently, and this should provide a clearer picture of the potential earning upside of this latest technology. Looking back, we observe that the local telco companies’ valuations have made a paradigm shift since 2011. As a result, we have standardise all our telcos standard deviation (“SD”) base year (which we are using to determine our targeted SD and subsequently derive the target prices for each telco under the EV/forward EBITDA methodology) to year 2011 from various base years previously. This has prompted us to re-rate all our telcos’ target prices even though their respective earning’s estimates remain unchanged. TM (OP, TP raised to RM6.80 from RM6.50 previously) remains our top pick in the telco sector. Our Maxis target price, meanwhile, has been raised to RM7.20 (from RM7.00 previously)  while Digi’s fair value is now pegged at RM5.77 (from RM4.95 previously). We are also raising our rating on both the stocks to OUTPERFORM from MARKET PERFORM previously. We, however, are maintaining our MARKET PERFORM call on Axiata albeit the target price has been raised to RM6.81 from RM6.53 previously.  

   

4G LTE plans. Both Maxis and Celcom have unveiled their 4G LTE services during the first week of 2013, paving the way for mobile subscribers to enjoy faster mobile broadband speeds in the future. While both companies kicked off their 4G LTE service in the wireless broadband segment (i.e. through the use of dongles), we believe that they will bundle the technology with smartphones later when more 4G LTE mobile devices (that are compatible with Malaysia’s LTE network) are introduced in mid-2013.

How fast could the uptake rate be in Malaysia? There is no clear projection or indication on the country’s LTE subscription growth rate at this juncture given that the mobile operators have yet to clearly specify their positions in this latest mobile broadband technology as well as the lack of 4G handsets in the market currently. We believe, mobile operators will need to decide whether their LTE service is just another part of their mobile broadband services or to position the technology as offering significant benefits over 3G. If it is the latter, this suggests that mobile incumbents will need to provide more value-added services rather than just rely on the LTE speed to convince consumers of the value proposition of the using the LTE services. Operators would need to clearly convince to consumers on why should consumers sign up to LTE and what difference does speed to them. We reckon that the uptake rate can only be estimated more accurately once the abovementioned areas are made clearer later. 

4G LTE service – an additional new revenue opportunity to mobile operators? At present, the answer is still unclear as the mobile operators have yet to specify their respective 4G LTE strategies. Thus, we have yet to impute any earning contribution from this new 4G service into our Telcos’ FY12-FY14 financial models. We believe that mobile incumbents need to build a story out of LTE and not just sell the speed at competitive price if they want to capitalise on the technology. Users will consume more data over LTE if the experience is markedly better than 3G and if so, they are likely to be willing to pay more to use the service. As a result, we are of the view that operators should bundle their LTE service (with smartphone devices) with small amounts of data per month (i.e. 1GB or 2GB) to encourage the uptake of the service later.

A paradigm shift in Telcos’ valuations since 2011. We believe the local telcos incumbents have experienced a paradigm shift on their valuations since 2011 given the more generous dividends (in terms of absolute amounts) that had been declared and more importantly, the more active capital management being announced since then. As a result, all the telco players’ valuations (i.e. forward PER and EV/forward EBITDA) had seen a much higher expansion rate as compared to the earlier periods. We have standardise all our telcos standard deviation (“SD”) base year (which we are using to determine our targeted SD and subsequently derive the target prices for each telco under the EV/forward EBITDA methodology) to year 2011 from various base years previously (please refer to overleaf page for detail explanation).

Source: Kenanga