Telecommunications — 2QFY2010 report card

Telecommunication sector
Maintain overweight: Among the four telecommunication stocks that are under coverage, two came in within our expectations, one came in above and one came in below our expectations.

All three mobile players continued to register positive quarter-on-quarter (q-o-q) revenue growth in 2QFY2010 (Celcom Axiata Bhd: +1.1%; DiGi.Com Bhd: +3.5%; Maxis Bhd: +1.8%) mainly due to: (i) higher mobile revenue (which rose q-o-q on the back of rising non-voice revenue); and (ii) higher handset sales. However, earnings before interest, tax, depreciation and amortisation (Ebitda) margins for DiGi and Maxis in 2QFY2010 declined by 1.3 percentage points (ppts) and 3.4ppts to 43.3% and 46.9% respectively. We believe the q-o-q decline in Ebitda margins for DiGi and Maxis was mainly due to higher handset and dongle subsidies.

Q-o-q, net debt and net debt/Ebitda for mobile players generally improved in 2QFY2010 on the back of stable free cash flow (with still healthy revenue growth and Ebitda margins). Going forward, while we expect ARPU to remain under pressure, we believe the financial standing of the mobile players will remain firm, mainly on the back of: (i) mid to high single-digit revenue growth; (ii) stable Ebitda margins; and (iii) declining capex requirements.

With these coupled with the mobile players’ well-articulated dividend policies, we are keeping our view that most telcos (with the exception of Axiata, which we think is still very much a growth story) will continue to offer generous yields to investors.

In the postpaid mobile segment, Celcom appears to have done relatively well, with market share in 2QFY2010 increasing by 0.6ppts q-o-q, at the expense of both DiGi and Maxis, whose market share in 2QFY2010 declined by 0.5ppts and 0.9ppts respectively. On the other hand, we note that the market share of all three players in the prepaid segment in 2QFY2010 declined q-o-q. We suspect this could be due to increased competition from U-mobile and other mobile virtual network operators (MVNOs). For the mobile broadband segment, we note that all three mobile players have been able to maintain their market share (with Celcom remaining the market leader) and we believe this is mainly due to the absence of an intense price war in the still growing market.

As expected, nonvoice revenue/mobile revenue for both DiGi and Maxis have continued to rise for the past four quarters. We also understand that Celcom’s non-voice revenue/mobile revenue in 2QFY2010 rose to about 32% from about 26% a year ago.

Risks include: (i) weaker than expected subscriber additions; (ii) execution (such as network upgrades and expansion); and (iii) an all-out price war. We maintain our “overweight” call on the sector for now. — RHB Research Institute, Sept 3

This article appeared in The Edge Financial Daily, September 6 2010.