We are maintaining our OVERWEIGHT view on the
Telecommunication sector. Despite a lacklustre price performance for the YTD,
the sector’s defensive nature and reasonable dividend yield will still be able
to provide investors with the much-needed shelter during the current period of
uncertainties. The sector’s outlook remains intact, in our view, judging from
the incumbents’ FY13 KPIs and their earnings guidance. Based on our actual
price/consensus target price study, we believe that there could be some
nearterm trading opportunities in Telekom Malaysia (‘TM”) and Digi. Even if the
trend of “flight to quality” is downplayed, we believe the sector could find
its near-term floor level when the incumbents’ EV/forward EBITDA valuations
fall to their respective mean levels. Valuation-wise, we have trimmed all our
big capitalisation telco companies’ targeted standard deviation (“SD”) level by
0.5x each after taking the following factors into the consideration: 1)
potentially higher than expected margin pressure; 2) lack of dividend upsides
in the 1H and 3) the fact that LTE earnings opportunities may kick in only
later rather than sooner due to the absence of an LTE eco-system. Our big
capitalisation telco companies’ target prices fell by 2%-6% after the
above-mentioned SD adjustments, which also implies a lower EV/forward EBITDA
multiplier. TM (OP, TP: RM6.25 (from RM6.68 previously)) remains our top pick
in the telco sector due to its solid presence in the FTTH market and the lesser
competition seen in its wholesale and fixed-line segment. We also reiterate our
OUTPERFORM ratings on both Maxis and Digi although their target prices are now
lower at RM6.75 (from RM6.92 previously) and RM5.30 (from RM5.60) respectively.
Meanwhile, our Axiata (MP) TP has been lowered to RM6.60 from RM6.86 previously.
There is, however, no change in our OUTPERFORM call and target price on Redtone
(TP: RM0.56).
4QFY12 results snapshot. Local telco players posted mixed
4QCY12 results. TM is the only incumbent that recorded better than expected
results due to a higher turnover that was led by lumpy other telco related services
segment income. Maxis and Axiata’s results were within the street and our
expectations while Digi was hit by higher operating costs due to a higher
handset subsidy and competitive IDD pricings. On the dividend front, all the
incumbents’ full-year dividends came in within expectations except for TM,
which failed to meet the market expectations of tabling a special dividend/capital
management plan.
FY13 KPIs. All the incumbents are still expecting mid to
single digit revenue growth in CY13 despite the intense competitions.
Margin-wise, all the industry players are expecting some margin constrains as a
result of the higher contribution from their data segment. Nevertheless, in
absolute terms, players are still targeting to achieve a mild annual EBITDA
growth, if not flat, suggesting the earnings outlook for telco operators are
still intact in the current financial year.
Intensifying competition in the IPTV segment. Both Astro and Maxis have targeted
to unveil their joint IPTV packages by end-April. We believe that it will
provide a head-to-head competition to TM’s Unifi should the latter fail to
implement its customer retention plans as well as enrich its current bundled
IPTV plans.
Trading opportunities in TM and Digi? TM’s share price has corrected
13.1% for the YTD and is now at a 8.5% discount to its consensus target price
(“TP”) of RM5.74. The discount is about 780 bps below TM’s 5-year actual
price/consensus TP discount rate of -0.7%. Should TM’s consensus TP remain
unchanged, this suggests some near-term trading opportunities may arise if the
discount rate narrows to its mean level. Similarly, Digi’s share price is
currently trading at a 8.9% discount to its consensus TP of RM4.85. The
discount is about 700bps below Digi’s 5-year average actual price/consensus TP
discount rate of -1.9%. In contrast, however, to the above two companies, Axiata’s
actual price /consensus TP discount rate is now above its average level. This suggests
a potential downside risk for the stock should the discount widen to its mean
level. Maxis’ share price level, meanwhile, is fair in our view given that its
discount rate is close to its mean level.
Near-term floor valuations. In view of the 13th GE concern /
uncertainties, market could remain volatile. Apart from the ability to pay
decent dividends, we believe that the sector could see excellent buying
opportunity or could reach its near-term floor level when the incumbents’
EV/forward EBITDA valuations fall to their respective mean levels. Based on our
estimate, Axiata’s share price could see its worst performance at its floor
level to RM5.47 (-13.6%) followed by Digi (-9.5% to RM4.00), Maxis (-7.1% to
RM6.05) and TM (-6.3% to RM4.92). Should the incumbents’ share prices fall to
these floor levels, the sector’s dividend yield will be more reasonable at 4.9%
as compared to the current 4.3%.
4QFY12 results snapshot. Local telco players posted a set of
mixed 4QCY12’s results. TM is the only incumbent that recorded better than
expected result due to higher turnover of its lumpy other telco related
services segment income. Maxis and Axiata’s results were within the street and
our expectations while Digi was hit by higher operating costs due to a higher handset
subsidy and competitive IDD pricings. On the dividend front, all the
incumbents’ full-year dividends came in within expectations with the exception
of TM, which failed to meet the market expectations to table a special
dividend/capital management plan. Moving forward, celcos are likely to unveil
their respective LTE service detail road maps in the coming months, where we
believe online video service could be a key focus even though 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
benefit the network backhaul providers (i.e. TM and TDC) in the long run due to
the higher data offloading demand.
FY13 KPIs and earnings guidance. While competition continues to
intensify in the local telco sector, all the incumbents are still expecting a
mid-single digit revenue growth in CY13 based on their latest KPIs as well as
earnings guidance. Margin-wise, all the industry players are expecting some
margin constrains in the current year, although this is not a major concern to
us given that their revenue growth will be mainly driven by higher data
contributions, which typically contribute lower margins as compare to the
traditional voice business. In absolute terms, all the players are still
targeting to achieve a mild EBITDA growth, if not flat, suggesting thus that
the earnings outlook for telco operators are still intact in the current
financial year.
Current dividend yields for both Maxis and Digi
are still sound.
Maxis has reiterated its intention to maintain another RM0.40/share dividend in
FY13, which translated to a dividend yield of 6.2% based on its 15 March 2013
closing price of RM6.50. Based on our observation, Maxis’s current dividend of
6.2% still lies within the range of its historical 3-year average and its
highest dividend yield of 5.21%-7.51%, suggesting thus that the stock still has
some rooms for yield compression going forward.
Digi, on
the other hand, in continuously finding ways to improve its shareholders value,
the group intends to maintain its present dividend policy, which is currently
set at a minimum 80% payout ratio and to be paid on a quarterly basis. In fact,
the group has continued to reward its shareholders generously by declaring more
than 100% dividend payouts in the past few years. Nevertheless, we saw some
softening signs in its 4QFY12 results, where the group had merely declared a
2.5 sen or 80% payout ratio as compared to its 100% payouts in the past as
highlighted above. We have thus lowered our FY13 DPS forecast to 18.4 sen after
taking a more conservative view by reducing the targeted dividend payout ratio
to 85% (from 100% previously) post its results above.
Based on
our Digi’s FY13 DPS forecast of 18.4 sen, the group’s current dividend yield of
3.9% seems fair given that the yield is already close to its 4-year historical
dividend yield range, albeit at the lowest end. Our FY13 DPS is about 35% lower
as compared with the consensus DPS estimate of 24.8 sen, which we believe the
latter to be likely premised on a 100% dividend payout ratio. Adopting the
consensus FY13 DPS forecast of 24.8 sen to the group’s 4-year average and
lowest dividend yields of 4.74% and 4.04% respectively, Digi could be valued at
RM5.23-RM6.14 per share. Meanwhile, should we adopt a 100% dividend payout
ratio into our financial model, its FY13 DPS forecast could rise to 21.6 sen,
which suggests that the group could be valued at RM4.56-RM5.34/share based on
its historical average and lowest dividend yield.
Scope for special dividends. Axiata has recommended a special
dividend of 12 sen (FY11: nil) in conjunction with its 4QFY12 results release.
The group has progressively increased its DPR (dividend payout ratio) from 30%
in FY10 to 60% in FY11 and 70% thereafter. Going forward, we see a potential
dividend upside on our current FY13 DPS forecast of 23.6 sen (3.8% dividend
yield), which is based on a 70% payout ratio judging from the fact that the
group has shown an intention to increase its DRP progressively. We estimate
that the group still has ample cash of about RM5.7b (from RM7.9b as of
end-FY12) after distributing a final dividend of RM1.3b (or 15 sen/share) and a
special dividend of RM1.1b (or 12 sen/share). The group recorded a gross
debt/EBITDA ratio of 1.7x as of end-FY12. The ratio is still below its optimal
capital structure of 2.0-2.2x gross debt/EBITDA level, suggesting that Axiata
still has rooms to leverage up its balance sheet if needed.
TM, on the
other hand, has disappointed the market with the absence of a special
dividend/capital management plan in FY12. Despite the disappointment, we still
believe that there could be still scope for the group to declare special
dividends in FY13 albeit the quantum may not be the same as what shareholders
have enjoyed in the past (RM1.07b or RM0.30/share each for both FY10 and FY11).
Management has argued that the absent of the special dividend in FY12 was
mainly due to the lack of further co-HSBB investment by the government as well
as the company preserving its cash for competition ahead. Nonetheless, in view
of its declining capex trend coupled with its strong retained earnings (RM4.2b
as of end-FY12) as well as its underleveraged balance sheet (2.1x gross
debt/EBITDA ratio as of end-FY12 as compared to its maximum optimal capital structure
ratio of 2.5x), we hence do not discount that there could be some dividend
surprises by end-FY13. All in all, we reckon that the possibility of a special
dividend For TM in FY13 will likely only be apparent in the late 2H. As such,
we are maintaining our TM’s FY13 DPS forecast of 19.9 sen for now, which is
based on a targeted 90% dividend payout ratio.
Intensifying competition in the IPTV segment. Both Astro and Maxis are targeted
to unveil their joint IPTV packages by end-April. Based on our earlier
understanding, the upcoming Astro-Maxis IPTV packages will be likely be priced
at a similar level to the current Astro-Time IPTV packages. As such, we believe
that the former’s packages will be priced at between RM248 and RM378 per month,
depending on the broadband speed powered by Maxis.
Under the
current Astro-Time IPTV packages, Astro is packaging its TV contents via four
super pack products ranging between RM100-RM130/month. We understand that the
Astro super packs are its four new Astro packages that are tailored made to suit
each customer needs. They comprise the best of Astro’s channels and packages,
including Astro Family, Sports, Movies, a choice of three Minis and at least
two vernacular packages. On top of that, the packages also include premium
Astro services such as High Definition and Personal Video Recording. Note that
some Media Prima’s channels (i.e. NTV7 and 8TV), channel Al Hijarah (114) and
TV1 (180) are not available on Astro B.yond IPTV at this juncture.
TV
content-wise, we understand that the upcoming Astro-Maxis IPTV packages will be
similar to the current Astro-Time IPTV, where Astro may bundle all its channels
under the same superpack packages. On the subscriber front, we understand that Astro-Maxis
IPTV subscribers will be classified as Astro’s users and Astro will receive all
the TV content APRU as well as certain percentages from the broadband ARPU.
Astro-Maxis IPTV subscribers will receive a single itemized bill from Astro.
Meanwhile, we also understand that Astro is eyeing to record a number of 500k
IPTV subscribers within the next 3-5 year period.
