Wednesday, July 10, 2013

Telecommunications – Malaysia: Position For LTE Excitement Next Year (UOBKH)

Telecommunications – Malaysia
Position For LTE Excitement Next Year
We upgrade the telco sector to OVERWEIGHT and upgrade Axiata to BUY from HOLD previously. The rollout of LTE networks and increasing number of LTE handsets offer opportunities to grow data revenues. Supported by stable cash flows, Digi and Maxis offer 5% and 6% net dividend yields respectively, while Axiata wins investors over with either higher earnings from consolidation overseas or from higher dividends. BUY Digi (top pick) and Axiata.

What’s New
• LTE brings more capacity... The higher capacity of LTE technology enables celcos to handle more traffic, ie celcos can add more subscribers to their networks to generate more revenues. In particular, for Digi whose growth has been restricted by the limited amount of spectra it has, having the LTE spectrum will make a significant difference. It has gone to the extent of targeting the dongle (heavy traffic users) segment again.

• …and is supported by more LTE handsets... At the launch of Malaysia’s first LTE service (by Maxis) in Jan 13, only Nokia handsets (in Malaysia) were compatible with the 2.6GHz LTE band vs 1.8GHz band that the iPhone 5 operates in. By Apr 13, Samsung, HTC and LG were offering their 2.6GHz handsets in Malaysian.

• …and greater licence flexibility. In 2Q13, the regulator started allowing celcos to offer LTE services in the 1.8GHz space as that is where more LTE handsets are operating in. This quickly enabled LTE-enabled iPhone 5 users to access LTE networks.

• …yet costing little. Capex needed to turn on an LTE site is a minimal RM20,000-30,000 per base transmission station (BTS), which we estimated to be about 10% of a celco’s annual recurring capex. This is because celcos roll out new coverages in high-income locations before going nationwide. Besides, most network upgrade works were completed last year. As time passes, the cost of technology (capex) usually falls.

• Stronger earnings growth and healthy free cash flows drive capital management. We expect the Big Three celcos to register 2-year (2013- 14) earnings CAGR of 7% vs 5% recorded in 2011-12. Free cash flows is forecast to register a healthy 2-year (2013-14) CAGR of 11%, similar to 2011-12. These continue to lend support for capital management with Digi and Maxis offering potential 5% and 6% net dividend yields.

• Upgrade to OVERWEIGHT. We expect the market to shift its focus to 2014 earnings in the coming months, and in view of the excitement next year, we upgrade the telco sector to OVERWEIGHT. We roll over our valuation window for telco stocks under our coverage to 2014, and raise the target prices for Axiata, Digi, Maxis and Telekom Malaysia (TM) to RM7.15, RM5.45, RM6.90 and RM5.65 respectively.

• Upgrade Axiata to BUY with a SOTP fair value of RM7.15 (vs RM6.52 previously). Despite its huge cash pile, we believe Axiata is holding out for potential opportunities in a consolidation (instead of paying more dividends), eg in Indonesia. This potentially translates into earnings upgrade for the group, and hence, its SOTP valuation. Otherwise, we expect Axiata to return excess cash to investors.

• Maintain BUY with RM5.45 DCF-based target price on Digi for its 2- pronged catalysts. We expect its 2Q13 EBITDA margin to recover, following three consecutive quarterly declines. Slower handset bundle sales in 2Q13 helps to improve margins as Digi expenses off subsidies upfront. Higher margin bundle subscriptions also lifts margins. The longer-term catalyst comes from more capital distribution if Digi adopts a business trust model.

• Moreover, Digi benefits from the additional capacity of LTE as it has fewer spectra than its larger peers. This allows it to be more aggressive in selling data services, including targeting dongle users again.

• Maintain HOLD on Maxis with DCF-based target price of RM6.95 (vs RM6.65 previously) given the lack of catalyst. Though its 40 sen DPS (6% net yield) is sustainable, the resulting rising debt level caps the upside on its DCF valuation.

• Maintain HOLD on TM, with DCF-based target price of RM5.65 (vs RM5.30 previously). While TM diversifies its revenues towards corporate and government customers (away from consumers), this segment contributes only 18% of TM’s total revenue (vs consumer’s 27%) and earns low margins. Also, Maxis’ tie-up with Astro threatens TM’s IPTV business with overall cheaper bundles vs TM’s as well as much better content (than TM).

Sector Catalysts
• Higher capital distribution, passing-through of the 6% service tax to prepaid customers, and adverse effect from weak global markets/economies are supportive of the defensive telco sector.

Assumption Changes
• No change to our forecasts.

• Good long-term prospects, driven by broadband growth... We gather that 3G handset penetration is about 40%, half of which are smartphones. This low adoption offers celcos lots of opportunity to grow their mobile internet revenues. Falling handset prices lowers the barrier for consumers to adopt mobile internet. We foresee growth potential towards a 70%-penetration rate, ie doubling of internet adoption, over the next few years.

• …especially for Digi. Advanced data services (ADS; excluding SMS) revenues contributed 26% of the Big Three’s 1Q13 total revenues – Maxis at 33%, Celcom at 24% and Digi at 16%. We believe Digi has more room to grow vs its larger peers because: a) positioned as a youth brand, Digi appeals to the higher data (traffic) user group, and b) coming from a lower base, means Digi has more to catch up to its larger peers.

• Building scale and profitability in data. With improving economies of scale, EBITDA margins can improve towards the 44-48% overall margins of celcos vs about 20-30% for internet services currently. While competition may cap the upside on margins, passing on these savings to customers in the form of lower tariff will encourage greater use of mobile internet, given the positive elasticity in this segment.

• Expanding coverage. While Celcom and Maxis have 3G coverage of 70- 80%, Digi, who was late in the game, is targeting to reach 70% by Dec 13. For 4G LTE, Maxis had rolled out this service in several locations while Digi has just launched its LTE services in selected areas last week. We have factored in RM691m in 2013 capex for Digi, vs RM910m and RM838m for Celcom and Maxis respectively. These represent 9-11% of their respective 2013F revenues.

• Additional regulation by the Malaysian Communications And Multimedia Commission (MCMC) that could pressure margins, and re-farming of the 900MHz spectra are the main concerns.

Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian Research
Publish date: 09/07/13

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