PETALING JAYA: Telecom stocks will continue to be on the radar screen of investors as they will continue to seek out stocks offering generous dividend yields even though valuations are not cheap.
RHB Research analyst Lim Tee Yang views positively the allocation by the Malaysian Communications and Multimedia Commission (MCMC) of the 2600Mhz spectrum to eight players recently as the 4G long-term evolution (LTE) spectrum allows the industry to address nomadic users who want high-speed wireless Internet.
“However, the revenue opportunities may be limited at first since 4G coverage will be done selectively in urban areas first, in our view. In addition, there is a lack of 4G handsets in the market currently,” he said.
Lim, who initiated coverage on Time dotCom Bhd (TdC) with an “outperform” call on the stock, said in a report that the company had strong earnings potential in its regional bandwidth business and lower valuation compared with other telco players while Telekom Malaysia Bhd's (TM) prospects were deemed to remain intact.
He views positively TdC's submarine cable business as demand for the bandwidth capacity would increase in the Asia-Pacific region.
“We forecast TdC's revenue to grow at a compounded annual growth rate of 26.8% for the financial years 2011 to 2014 driven primarily by sales in the wholesale segment, as well as full-year contributions from the acquired businesses.
“Within the wholesale segment, management is keen to tap into the transborder data traffic that TdC can carry via its network from Thailand and Indo-China into Singapore.
“Going forward, the completion of the Asia-Pacific Gateway cable by end-2014 offers TdC an opportunity to reduce its reliance on Singapore as a hub, and therefore improve margins,” he said.
However, revenue growth might be lumpy due to the international bandwidth sales, which were typically in the form indefeasible right of use agreements, he added.
Lim pointed out that TM's dominanance in the fibre retail market would erode gradually but noted that the company should benefit from more wholesale high-speed broadband (HSBB) revenue if the partnership between Maxis Bhd and Astro Malaysia Holdings Bhd became a success.
TM also has an “outperform” call.
“Malaysian Communications and Multimedia Commission decision not to regulate while sale HSBB rates is a positive development for TM, given concerns over potentially lower margins if otherwise,” Lim added.
Meanwhile, Axiata Group Bhd, DiGi.Com Bhd and Maxis Bhd were rated “market perform”.
Lim expected Axiata's revenue growth to moderate as XL's growth in Indonesia began to trend downwards even though it was still strong.
DiGi was the only company which guided its outlook for 2013. The company expects revenue to grow by 5% to 7% while margins for earnings before interest, taxes, depreciation and amortisation (EBITDA) to remain stable.
Lim said Maxis' growth story would come from the partnership with Astro, which would give the company a “significant advantage” over competitors in getting a larger share of the fibre market.
“We believe earnings growth will continue to remain challenging. Maxis' EBITDA margin may be diluted in the short term due to an undisclosed minimum annual investment in the first year of the partnership,” he said, adding that the company's aggressive handset subsidies had also contributed to the thinning EBITDA margins.
Lim has an “overweight” for the industry as a whole on expectations that investors would continue to seek out telco counters for the generous dividend yields amid the ample liquidity in the market.