Diverging prospects for Axiata and TM

In our previous article, we highlighted DiGi and Maxis as fairly attractive investments for those seeking higher than market average yields with defensive qualities.

Axiata: Growth prospects with maiden dividends in 2011

Axiata, on the other hand, offers investors better growth prospects with its portfolio of investments in fast-growing regional markets — whilst retaining a degree of resilience underpinned by its domestic operating unit, housed under Celcom.

In particular, its ventures in Indonesia (XL is the third largest telco in the country) and Bangladesh (70%-owned Robi is a joint venture with Japan’s NTT Docomo) have been registering strong growth.


Celcom improves on margins
Celcom, the second largest cellular operator in Malaysia by market share, has not been faring too poorly either, despite the relative saturation of our market. It registered better than industry average revenue and net profit growth of 10.9% and 24.2%, respectively for 9MFY10. Celcom accounted for 43% of Axiata’s total operating profits for the 9MFY10.
The operating company had 11.1 million subscribers as at end-3Q10 or roughly 33.8% share of the overall market. It had a good head start in the mobile broadband segment given its wide 3G network coverage, estimated at about 80% of the population.

However, aggressive competition from the other operators has pared its share of this fast-growing market segment to about 54%, down from 62% at end-2009. We could see its market share dip further, especially with the entry of yet another player, YTL Communications. As such, earnings growth could taper off going forward.


Overseas units expected to maintain double-digit growth
Revenue and net profit for XL grew 32% and 73% respectively in the first nine months of 2010 over the previous corresponding period. Net profit for the nine-month period totalled 2.1 billion rupiah (RM706 million) on the back of a subscriber base of about 38.5 million. Growth is expected to remain in the double-digits this year.

Over the same period, Robi reported a 38% revenue growth while net profit improved to 800 million taka (RM34.4 million), from 147 million taka in the previous corresponding period. Subscribers increased to 15.5 million at end-3Q10, up almost 42% from 10.9 million at end-3Q09. As with XL, Robi — with a current market share of some 18% — is expected grow in the double-digits this year. In fact, the company expects Robi to be one of the biggest growth drivers for Axiata going forward.

At the same time, its investment in Sri Lanka (Dialog) has been turning around smartly over the past few quarters. The gradual improvement in operating margins and lower borrowing costs underpinned its return to profitability last year. Net profit totalled 3,772 million rupees (RM104 million) for the 9MFY10.

Axiata’s overseas holdings also include strategic stakes in Indian operator, Idea Cellular, Hello in Cambodia as well as M1 in neighbouring Singapore.


30% dividend payout for a start
Axiata’s valuations appear attractive — forward P/E estimated at roughly 13 times — relative to its prospective growth rates. The company also expects to pay its maiden dividends this year on the back of improved cash flow from all of its operating companies.

The company has indicated a minimum 30% earnings payout for a start, which should rise gradually over time if all goes to plan. Based on our earnings forecast, a 30% payout translates into dividends totalling roughly 11 sen per share, which will earn shareholders a fairly decent net yield of 2.3% at the prevailing price.


TM reaffirms dividend policy despite earnings shortfall
Recall that Axiata was formed following a demerger exercise at Telekom Malaysia (TM) that was completed in 2008. After hiving off its fastest growing cellular operating companies, TM has, by and large, promoted itself as a high yielding stock.

The company’s dividend policy calls for a minimum payout of RM700 million or 90% of net profit, whichever is higher. TM has paid the minimum RM700 million in dividends for the past two years even though earnings have fallen short of this level — and looks to fall further in 2010.

Net profit, excluding forex and other one-off gains, totalled just about RM325 million in the first nine months of 2010. We estimate normalised net profit at about RM437 million for the full year, down from RM602.5 million in 2009.


Growth outlook for TM is less than upbeat
Growth in the company’s fixed line business has been flattish in recent years. The data and Internet businesses are growing rapidly but competition is also intensifying. For instance, WiMAX operator, P1, has taken a slice of the fixed broadband market since its launch in August 2008. We estimate P1 currently has about 12% share of this market segment that was previously monopolised by Streamyx.

Perhaps more significantly, there are signs of cannibalisation of the fixed broadband market by cellular operators offering mobile broadband services. It is interesting to note that the number of new mobile broadband subscribers is more than 2.5 times that for fixed broadband in the first nine months of 2010. We expect this will remain the case going forward given our demand for ubiquitous connectivity.

Positively, TM’s HSBB project may tilt the balance somewhat to its favour. Its fibre-to-the-home network is capable of high-speed Internet access and can offer value added IP-based services such as IPTV and video-on-demand. Presently, its UniFi service is available to some 700,000 households, which will rise to 1.3 million by 2013.

However, take-up has yet to pick up steam with only some 29,000 installation plus orders as at mid-Nov 2010. Given the high upfront costs — total project cost is tagged at RM11.3 billion, of which RM2.4 billion will come from the government — and slow take-up rate, the project is unlikely to see positive returns for the foreseeable future.

Meanwhile, capital expenditure for the company is expected to remain significant over the next few years. So far, we estimate about RM3 billion has been spent for the HSBB project. TM’s gearing stood at 34% — net debt totalling RM2.57 billion — as at end-3Q10.


Proceeds from shares sales support RM700m dividend payout
Fortunately, proceeds from the disposal of shares in Measat Global (RM252 million) and Axiata — some 90 million of total holdings of 191.5 million shares have been sold, so far, at RM4.60 per share — will allow TM to maintain its minimum dividend payout over the next two years, even if earnings growth remains lacklustre, without over-straining its balance sheet. Over the longer term, however, it remains to be seen if a dividend payout that far exceeds earnings is sustainable.


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, January 14, 2011.