Tuesday, 12 March 2013

Regional Telecoms - Hold The Line, Please

We remain NEUTRAL on the regional telecoms  sector as industry earnings are  pressured  by  decelerating  revenue  growth,  rising  opex  and  increased depreciation  from  aggressive  network  deployment.  Telcos’  uncompelling valuations, margin pressure and capex risks are the sector’s Achilles heel, invoking a stock-picking strategy to  identify winners. Except for Thailand, on  which  we  are  OVERWEIGHT,  we  are  NEUTRAL  on  the  Malaysia, Singapore  and  Indonesia  markets.  Our  top  regional  picks  -  AXIATA, STARHUB  and  ADVANC  -  are  not  necessarily  outright  buys  although blessed with stock-specific catalysts.
Capex  starts  to  weigh  in.  The  region’s telcos  are  upgrading  their  networks  to cater  for  the  exponential  growth  in  data  consumption  led  by  rising  smartphone penetration. The capex upcycle in Indonesia has started in earnest (see Fig. 3) given the race to improve coverage and capacity. Over in Thailand, telcos are beginning to deploy 2100 MHz networks following awards of the 3G  spectrum last December as illustrated on Fig. 4. In Malaysia and Singapore, capex is levelling off although there is still modest spending on 4G/LTE and legacy networks (TM). The rising opex and depreciation  from  network  expansion  and  maiden  3G  deployment  will  curtail  the sector’s earnings, resulting in lackluster growth for FY13/14. Capex intensity is likely to  remain  high  for  the  next  2  years  before  easing  in  2015  as  network  spending normalises.
Source: RHB

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