Telecommunications sector
(March 5)
Maintain neutral with an unchanged top pick of DiGi.Com Bhd. The sector continues to perform well despite its lofty valuations, likely as portfolio funds seek certainty and yields amid macro uncertainties.

We think the sector can continue to hold onto its gains despite dividend yields compressing. We are projecting sector earnings growth of 3.9% for 2015 underpinned predominantly by revenue expansion and stable margins.

For sector exposure, we like DiGi.Com which continues to gain market share on improving coverage and network quality. Its attractive bundling packages and low device price strategy should continue to spur growth, while its dividend upside remains as management continues to work on executing a business trust plan.

The 2014 core earnings for the telco sector slipped by 2.8% year-on-year (y-o-y) due to earnings declines at Axiata Group Bhd (9.3% y-o-y), Maxis Bhd (8.9% y-o-y) and Telekom Malaysia Bhd (TM), 9.4% y-o-y.

Axiata’s weaker earnings were attributed largely to weaker performances at both its key units, PT XL Axiata Tbk and Celcom Axiata Bhd. For Maxis, the earnings decline was due to continued erosion in revenue market share, although its transformational plans have begun to bear some fruit, evident in the fourth quarter of financial year 2014 ended December.

TM’s weaker earnings were largely due to tax incentives in 2013, which were absent in 2014. Excluding this, at the pre-tax level, TM’s  2014 earnings were higher y-o-y.

Notably, DiGi.Com was the only telco to register stronger earnings in 2014, up a hefty 19.1% y-o-y.

With the exception of Celcom, the two other large telcos registered positive net adds which largely came from the prepaid segment.

Maxis ended 2014 with a net add of 180,000 subcribers from a net loss of 1.1 million in 2013, as its transformational programmes got underway. Nevertheless, DiGi.Com remains the clear winner in terms of gaining revenue market share, ending 2014 at 31%, up from 28.9% in 2013.

But on the whole, in terms of subscriber share in 2014, DiGi.Com gained second spot in the prepaid market, pushing Maxis to third spot. In the post-paid segment, Maxis regained its position as market leader.

Margins for the telco operators remained healthy and well contained, despite increased competitive pressures. — AffinHwang Research, March 4

This article first appeared in The Edge Financial Daily, on March 6, 2015.