By G. Sharmila
Analysts say Malaysian telcos have been the worst performers in the Asean region year-to-date, yet their valuations remain the highest in this region. Is the sector still compelling enough for investors?
Sector background: The year so far has not been the best for the Malaysian telecommunications sector, with CIMB Research noting in July 31 report that the sector was the worst performing year-to-date (YTD). All four telcos under its coverage (DiGi.Com Bhd, Maxis Bhd, Axiata Group Bhd, and Telekom Malaysia Bhd or TM), were down by an average 7.9%, underperforming the FBM KLCI’s 3.5% decline during the period.
“This can be attributed to more intense competition and is in line with our call to downgrade the Malaysian telecom sector to ‘underweight’ in our Asean telco sector report ‘2015: A year to tread carefully’ in November 2014,” CIMB said in the report.
It noted that in comparison, Singapore telco share prices were down on average 3.4% YTD slightly outperforming the Straits Times Index’ 3.6% decline.
“Despite declining by an average 2.2% YTD, Indonesian telcos and infrastructure companies outperformed the Jakarta Stock Exchange Composite Index’ 8.5% drop. Meanwhile, the Thai telcos fell by an average 5% YTD versus the Stock Exchange of Thailand’s 3.2% fall,” CIMB said.
It pointed out also that despite its underperformance YTD, the Malaysian telco sector’s valuation remains the highest, trading at financial year 2016 (FY16) enterprise value/operational free cash flow of 15.4 times or a 12.4% premium to the Asean-4 average.
“In comparison, Singapore telcos trade at a lower FY16 enterprise value/operating free cash flow of 14.4 times but offer higher dividend yields of 5.3% to 5.5% versus Malaysia’s 3.9% to 4.1%,” the research house added.
It noted that Indonesian telcos trade slightly lower than the regional average, while Thai telcos have the lowest valuation in the region and offer above-average dividend yields of 4.6% to 5.6%.
What analysts think: According to CIMB Research, in Malaysia, the biggest risk remains a further deterioration of the competitive landscape upon the entry of TM-Packet One Networks (Malaysia) Sdn Bhd (P1).
“In addition, there could also be risk that the incumbents may lose some spectrum from a potential 900/1800MHz spectrum refarming exercise, which could take place in 2016,” it said.
CIMB Research also had something to say about the individual telcos. It noted that Celcom Axiata (a subsidiary of Axiata Group) is trying to win back market share with aggressive promotions.
“We think it will see positive net adds from third quarter of 2015. Coupled with better earnings performance at XL in second half of 2015, we see a gradual earnings recovery for Axiata,” the research house said.
The research house also said that DiGi’s prepaid market leadership position is under attack from Maxis and Celcom.
“While the heat from incumbents may ease by year-end, we are worried about TM-P1’s entry intensifying competition. DiGi is the most vulnerable due to its high prepaid revenue mix.”
As for Maxis, CIMB noted that it has attacked the prepaid market to gain market share and is likely to continue reporting positive operational traction in its next two quarterly results. However, intense price competition and higher operating expenditure are likely to limit its earnings growth potential, the research house opined.
CIMB views TM, via P1, as a credible threat to mobile incumbents given its spectrum assets and extensive fibre infrastructure.
“However, we do not expect to see any significant mobile earnings contribution in FY15-17 as building out a mobile network and distribution channels take time,” the research house said.
An analyst with another bank-backed research house agreed that going forward, competition among the telcos is going to continue to be intense, as will price competition.
“DiGi and Maxis’ first half earnings weren’t that fantastic, but we do foresee some growth for them. As for Axiata, the first half earnings will probably see some downside due to their Indonesian business, hopefully XL will gain better footing soon. As for TM and P1, TM’s earnings will probably be dragged down by P1, which is still loss-making,” the analyst said.
The analyst added that the TM-P1 tie-up will not threaten the big three telcos (DiGi, Axiata, and Maxis) anytime soon.
“Even if they come into the market, they will need to tie up with Axiata for roaming and networking and this will take time,” the analyst said.
Peer comparison:
StockStalk: With the price competition heating up among Malaysian telcos, investors are likely to go for telco stocks that either have a growth story or offer rich dividends.
From a look at the peer comparison table, DiGi and Maxis appear to have the most attractive dividends at 4.7% and 3.9% dividend yields respectively. However, with competition intensifying, all four telcos are likely to see their earnings under pressure this year.
We think that investors should take a cautious or neutral stance towards Malaysian telcos, as none of them are particularly exciting at this juncture. Until dividend yields become more compelling and strong growth returns to the sector, perhaps it’s best that investors stay put or look elsewhere for high-growth sectors.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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