Upgrade to overweight: We raise our telecommunications (telco) sector rating to “overweight” from “neutral” previously as values have emerged following the recent selldown. The current market uncertainties could also bode well for a defensive sector like telco. The sector’s aggregate service revenue and the normalised earnings before interest, taxes, depreciation and amortisation (Ebitda) margin remain intact for the first quarter of calendar year 2015 (1QCY15) despite total subscribers falling for the first time since 1QCY14. Our correlation study on share prices versus consensus’ target prices as well as the premium versus discount study on the sector’s price-earnings ratio versus the FBM KLCI suggested that the sector downside is limited from here.
On the corporate front, Telekom Malaysia Bhd (TM) and DiGi.Com Bhd could have reached or be close to their temporary bottom, while Maxis Bhd and Axiata Group Bhd may have another 2% to 4% downside from here. Competition in the mobile prepaid and post-paid segments appears to be escalating following the recent launch of various aggressive offers by incumbents. These could potentially lead to higher operating costs and lower margins moving forward.
Valuation-wise, while we make no change to our telco companies’ financial year 2015 (FY15) to FY16 earnings estimates, we have trimmed all our celcos’ targeted standard deviation (SD) levels by 0.5 times each to account for the challenges ahead, as well as shifting our valuation base year to FY16. Valuations for TM (target price (TP): RM7.80), meanwhile, remain unchanged as we had rolled over our valuation base year previously. We reiterate our “outperform” call on TM and DiGi (TP: RM6.69, down from RM6.87 previously) while keeping our “market perform” call on Axiata (TP: RM6.55, down from RM6.77 previously), and Maxis (TP: RM6.68, down from RM7.06 previously).
TM remains our favourite pick for the sector given that there is less competition in its fixed-line broadband business, potential better-than-expected synergies from P1, and more traction from high-speed broadband Phase 2 and Sub-Urban Broadband projects. Meanwhile, we continue to favour DiGi among the telcos due to its higher operational efficiency and better competency in monetising data. REDtone’s stock rating, on the other hand, has been raised to “outperform” following the recent share price weakness. Its target price, however, remains unchanged at 87 sen. — Kenanga Research, June 18
This article first appeared in The Edge Financial Daily, on June 19, 2015.