This article first appeared in Capital, The Edge Malaysia Weekly on March 13, 2023 - March 19, 2023

Telecommunications

OVERWEIGHT

KENANGA INVESTMENT RESEARCH (MARCH 8): The just-concluded 4Q22 results season was a mixed bag for stocks in our telecommunications universe. Axiata Group Bhd, CelcomDigi Bhd (CDB) and OCK Group Bhd exceeded expectations while Maxis Bhd and Telekom Malaysia Bhd (TM) underperformed on account of higher-than-expected depreciation charges and tax expenses largely incurred in the fourth quarter. The telcos as a whole saw commendable growth for 2022, with their top line seeing a 6% year-on-year (y-o-y) uptick and core net profit ending 8% higher y-o-y on account of a strong Ebitda (9M22: 8% y-o-y) mostly coming in 9M22 and contributed largely by Axiata and TM. The reopening of the domestic and regional economies saw continued demand for telecom services as consumers moved on from the pandemic. Axiata saw a 10% top line uptick on generally strong all-round performance from its operating companies, with the exception of Dialog (Sri Lanka) and Ncell (Nepal), but earnings surged 21% on strong contributions from Celcom (65% y-o-y) and Smart (Cambodia at 14% y-o-y). CDB and TM saw earnings upticks of 9% and 28% respectively, as Ebitda improved 8% and 14% respectively. Axiata’s Ebitda improved 11%.

We remain positive on the sector’s outlook premised on resilient demand from consumers and businesses, both locally and regionally. Players like CDB look set to benefit from the return of migrant workers. Demand for local mobile and broadband services will be supported by wider coverage as Phase 1 of the Jendela initiative nears completion. According to the Malaysian Communications and Multimedia Commission, almost 97% of populated areas have access to 4G networks (92% before Phase 1 of Jendela) and the average mobile broadband speed increased to 52Mbps (35Mbps initially). The promise of the 5G rollout will boost demand further with players like Axiata and OCK benefitting from the construction and fiberisation of more than 5,500 towers under the next phase of the 5G rollout.

We reiterate our “overweight” call for the sector as we believe the market has priced in various challenges related to the 5G rollout. Despite lowering our target price (TP) on most of the telecoms stocks in our universe, we still find the valuations compelling. We lower our TP for CDB to RM4.64 (from RM4.69) after guidance on low single-digit Ebitda growth; Maxis to RM4.52 (from RM4.59) after we factored in lower leasing charges in FY23; OCK to 69 sen (from 91 sen) on lower Ebitda; and TM to RM7.75 (from RM7.85) on account of higher operational costs.

Target price: RM2.98 BUY

RHB INVESTMENT RESEARCH (MARCH 8): On March 6, Dialog hosted an investor relations visit to its Pengerang Deepwater Terminals (PDT) in Johor. After the site visit, we reiterate our stance that the company will continue to be one of the key beneficiaries of the Pengerang development due to its exposure in the midstream and downstream divisions. In the near term, independent terminals could be buoyed by better utilisation and monthly storage rates while new capacity expansion could be on the cards.

Last month, about 190 vessels berthed at PDT, while the total vessels berthed YTD amounted to more than 1,300, which is higher than FY22’s 1,170 vessels. The bulk of the products were shipped from the Middle East. As such, Dialog guided that independent terminals have seen better utilisation rates of closer to 95%, versus 90% in the previous quarter, and the monthly spot storage rates are now above S$6 (RM20.06) per cu m, up from mid-S$5 per cu m last year. Meanwhile, the earnings impact for Pengerang Terminals (Two) is largely unaffected, although the Pengerang Integrated Complex’s (PIC) commercialisation was delayed due to its take-or-pay structure. Payment-wise, it is expected to catch up in the near term as PIC commercialisation is scheduled for 2H23.

We maintain our earnings estimates with an unchanged SOP-based TP of RM2.98 and incorporate a 0% ESG premium or discount, as Dialog’s ESG score is on par with the country median.

Target price: RM1.06 BUY

HONG LEONG INVESTMENT BANK RESEARCH

(MARCH 8): We came away from UMC’s briefing feeling upbeat about its prospects, underpinned by the new avenues it has in place to generate revenue growth. The group will be looking to venture into contract manufacturing of prefilled humidifiers to improve its overall economies of scale and reach more markets by tapping into the footprint of its potential customers. It will also tap into the ambulance service market by investing in an ambulance and leveraging this service to promote its resuscitation equipment.

UMC’s manufacturing segment is focused on the manufacture of its original brand prefilled humidifier, HydroX. However, it is now exploring the possibility of producing for other potential customers as they have received both original equipment manufacturing and original design manufacturing requests for prefilled humidifiers. We view this positively as this could (i) boost production output to reduce overall production costs and (ii) tap into potential customers’ larger footprint to reach more markets. Before being accepted as a contract manufacturer, UMC will be required to undergo strict audits to ensure standards are met and the process typically takes six months. Coupled with the need to register the products after the audit stage, the entire process could take up to a year, which would then coincide with the commercialisation of its new manufacturing plant, which is expected to be operational by end-2023.

Target price: 12 sen BUY

MAYBANK INVESTMENT BANK RESEARCH (MARCH 8): Icon plans to undertake: (i) a capital reduction and (ii) share consolidation exercises. The former is to eliminate the group’s past accumulated losses in order to facilitate the declaration of dividends in the future. The latter will involve the consolidation of five shares into one (from 2.7 billion shares to 541.3 million shares) to enhance its capital structure and reduce volatility in the trading of its shares. These exercises are expected to be completed by 3Q23.

Our FY23-24 earnings estimates of RM33 million to RM38 million are unchanged, based on a sustained utilisation rate of 68% and a daily charter rate of RM30,400 in FY23, which is a conservative assumption. We realistically expect Icon to post an improved y-o-y earnings performance in FY23 despite the absence of its drilling operations contribution. The y-o-y strength will be underpinned by improved operational performance at its offshore support vessel (OSV) division with higher daily charter and utilisation rates. Continued cost optimisation (disposal of ageing or idle OSVs and lowering of operational expenditure and overheads) will further fuel its bottom line.

Icon is looking at several business proposals to replace the income lost from its exit from the drilling operations. In the event a deal is not forthcoming over the next 12 months, Icon can be a constant dividend-paying stock in the interim (post the corporate exercises), in our view.

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