Telcos are good for yields

Despite the cellular market’s relative saturation — with penetration rate estimated at roughly 116% — key players continued to chalk up positive subscriber growth in 2Q10. Maxis, Celcom and DiGi collectively added some 652,000 subscribers in the last quarter, bringing the net increase for 1H10 to 1,515,000.

The new additions were underpinned by growth in the pre-paid cellular and mobile broadband segments while the number of post-paid subscribers shrank slightly.

Unsurprisingly, blended average revenue per user (ARPU) remained in a declining trend given the lower revenue from pre-paid subscribers. Some of the telcos, including Maxis and Celcom, have launched cheaper packages for their mobile broadband services — from as low as RM48 per month — to attract greater numbers.

Maxis: New subscribers yet to translate into stronger earnings In terms of absolute numbers, Maxis garnered the biggest share of new subscribers in 1H10, followed by Celcom and DiGi. However, the company also registered the slowest pace of revenue growth of only 2.3% year-on-year (y-o-y) while net profit actually dipped 5% from the previous corresponding period.

By comparison, Celcom’s revenue and net profit grew a robust 13% and 27%, respectively, during the same period. Maxis attributed its weaker results, in part, to its more aggressive marketing and promotion activities including sponsorship for the 2010 FIFA World Cup.

On a more positive note, we expect margins to improve in 2H10 from that in 2Q10 as it reaps benefits from the higher subscriber numbers.
Nevertheless, net profit is likely to be lower for the year, we estimate at RM2.18 billion or 29.1 sen per share. That implies its shares are already fairly valued at 18.4 times our estimated earnings at the current share price of RM5.37.

As such, we are unlikely to see fresh impetus for the stock, at least not without material improvement to its prevailing outlook. Investors are, however, hoping for a special dividend, on top of the company’s quarterly payout of eight sen per share. Assuming a special dividend of three sen per share, dividends will total 35 sen per share this year. That will earn shareholders a better-than-average net yield of 6.5%.

Mobile broadband (through the use of USB device) remains the fastest growing market segment, albeit from a small base. Maxis, Celcom and DiGi added some 459,000 new subscribers in the first six months of 2010 — or equivalent to an increase of more than 56% from end-2009.

With the increasing affordability of laptops and netbooks as well as the need for anytime-anywhere connectivity, there is certainly room for further growth. Indeed, new mobile broadband subscribers outpaced fixed broadband by about eight-to-three in 1H10.

The potential market for mobile Internet (through smartphones) is even larger. There are over 31 million mobile phones in use, or more than 10 times the estimated number of laptops and netbooks in the country. Whilst the percentage ownership of smartphones is still low, their popularity is rising rapidly.


DiGi banking on data to drive growth
Most telcos are betting on data consumption to drive earnings growth going forward. Data revenue made up some 20.5% of DiGi’s revenue in 2Q10, of which mobile Internet accounted for over a quarter of the contribution, more than doubled that in the previous corresponding quarter. DiGi estimates that over 2.72 million of its subscribers currently access the Internet at least once a month through their handsets.

The company fared quite well in 1H10, with revenue and profit growing by 8.3% and 9.2%, respectively from the previously corresponding period. Nonetheless, the stock too appears fairly valued at 17.4 times our estimated earnings of RM1.1 billion or 142.7 sen per share.

However, like Maxis, steady dividends are the primary attraction for investors. Assuming a 100% profit payout, DiGi will earn investors a net yield of 5.8% at the prevailing share price of RM24.80.


Estimated share of new broadband subscribers in 1H10
Indeed, higher than market average dividends appear to be a common thread for domestic telcos.

TM: Returns from HSBB only in the long run. Telekom Malaysia too has a generous dividend policy — minimum RM700 million payout or up to 90% of profits, whichever is higher. That works out to roughly 19.7 sen per share, which will give shareholders a net yield of 5.7% based on the current share price of RM3.44.

The higher than average yields are keeping its share price afloat, in the face of rather disappointing earnings. Net profit dropped 43% y-o-y in 1H10 to RM183.6 million (excluding forex and exceptional gains/losses).

Telekom is banking on its high-speed broadband (HSBB) project to spur growth going forward. The voice telephony business is in slow decline. The company aims to cover 1.3 million households for its fibre-to-the-home broadband services by end-2012.

Its UniFi services are now available in 22 areas with some 550,000 premises passed. Telekom indicated it had some 12,000 orders as at mid-August 2010 but meaningful boost to profit is only likely in the longer term. Thus, near-term capital gains for the stock appears limited with the stock trading at about 20.2 times our estimated earnings.

We will discuss a little bit more on the fixed broadband market in our next article. The key players in this market segment are Telekom’s Streamyx and Green Packet’s P1.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, September 17, 2010.