Maxis and DiGi offer yields at fairly low risks

We are fairly upbeat on the outlook for the telecommunications sector. As mentioned in our previous piece, the number of new subscribers is still growing strong despite the relative saturation in the market.

More importantly, consumers increasingly own multiple devices and require them to be connected to the Internet anytime, anywhere. The demand for data is expected to underpin growth for the cellular operators.

Also, earnings have proven to be relatively resilient — despite the intense competition. Strong operating cash flow, in turn, support higher-than-market average dividend yields.


Maxis: Good yields on fairly low risks
Maxis has been among the most aggressive in terms of its subscriber acquisition drive last year. The company added 1.23 million subscribers in the first nine months of 2010. It continues to lead with over 13.5 million subscribers or about 41.1% share of the market.

Nevertheless, because the majority of its new sign-ups are lower value pre paid customers, revenue growth was a tepid 2.5% for 9MFY10 over the previous corresponding period. Blended average revenue per user (ARPU) declined to about RM49 per month from RM54 per month at end-September 2009.
Coupled with higher marketing and promotional expenses, including those related to the 2010 FIFA World Cup event, as well as subscriber acquisition costs, the company’s total net profit actually declined 2.6% over the same period.

Positively, operating margins rebounded somewhat in the latest 3Q10 results, lifting earnings for the quarter to RM601 million, up from RM552 million and RM532 million in 1Q-2Q10, respectively.

We expect further subscriber gains in 4Q10 on the back of continued strong demand for smartphones, including the hugely popular iPhone 4 that was launched late-3Q10, and mobile broadband.

The cross selling of data plans — such as that designed for the iPad — to existing voice customers should also help boost ARPU. Manufacturers are lining up new tablet computers for launch in the coming months following Apple’s success in creating a niche market for the product.

Maxis has strengthened its network, which will be supportive of growth. Anecdotal evidence suggests that the operator has improved the quality of its service over the past year, adding width and depth to its 3G network, which now covers roughly 72% of the population, up from about 56% at end-2009. The company is able to provide one of the more consistent speed and coverage for mobile broadband services nationwide.

Nevertheless, we are more conservative with our forecast, at least for now. Net profit is estimated to total RM2.26 billion in 2010 and rising to RM2.35 billion this year. This implies a rather pedestrian 3.9% earnings growth for 2011. At the prevailing share price of RM5.30, the stock is trading at roughly 16.9 times our forecast earnings. That may suggest limited room for capital gains in the near term.

However, its dividend yields are expected to stay above the market average. We estimate dividends to total about 35 sen per share, consisting of quarterly dividends of eight sen per share and a special dividend in the last quarter of the year. This translates into an attractive net yield of 6.6% for shareholders.


DiGi: Collaboration with Celcom will boost margins
Similarly, we believe DiGi too is a good choice for investors looking for defensive investments with attractive yields. Although the telco is slightly off the pace in terms of overall subscriber growth last year, relative to peers Maxis and Celcom, it is having better success at growing the higher valued postpaid market segment.

Its blended ARPU stabilised at around RM53 per month over the past three straight quarters. This bodes well for the company going forward on expectations of more subscriber migration from prepaid to postpaid packages.

We forecast net profit totalling RM1.13 billion and RM1.22 billion for 2010-2011, respectively. That implies a slightly lower P/E valuation of 15.9 times forward earnings, at the prevailing price of RM25, to Maxis’ estimated 16.9 times P/E.

DiGi is in the midst of finalising a collaborative agreement with Celcom that could cover operations and maintenance, transmission and site sharing as well as radio access network. If all goes to plan, the tie-up could result in up to RM150 million in cost savings yearly. That is about 9% of our estimated pre-tax profit for the company this year. As such, we could see some upside surprise to our forecast, particularly going into 2012.

A successful partnership could also lead to greater collaboration in terms of developing the next generation network platform and lower overall capital spending. Last month, the company inked a 10-year agreement with Time dotCom to use the latter’s fibre network as part of its backhaul. Such infrastructure sharing arrangements are not surprising given the substantial capital expenditure required to keep pace of demand for bandwidth and evolving technology.

Even so, DiGi is planning to spend some RM700 million in capital expenditure this year to further improve capacity and widen its 3G network from the present 50% coverage.

DiGi’s relatively low gearing — estimated at about 34% at end-2010 — implies the company can sustain a high dividend payout, even exceeding 100% of net profit, for the foreseeable future. The company has indicated an optimal capital structure with gearing at 54% to 67%.

Hence, we are assuming a high 110% payout ratio and estimate dividends totalling RM1.60 to RM1.73 per share for 2010-2011. That will earn shareholders net yields of 6.4% and 6.9% for the two years at the prevailing price. DiGi pays dividends on a quarterly basis, but the amount varies from quarter to quarter.

We will discuss a little more of the telco players in our next piece.


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 12, 2011.