TELCO (NEUTRAL) Sector News Flash: Walking Down The Aisle

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD

Research House: OSK

Price Call: BUY

Target Price: 5.60

Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD

Research House: OSK

Price Call: BUY

Target Price: 5.50

Stock Name: DIGI
Company Name: DIGI.COM BHD

Research House: OSK

Price Call: HOLD

Target Price: 4.00

Stock Name: MAXIS
Company Name: MAXIS BERHAD

Research House: OSK

Price Call: HOLD

Target Price: 5.10

THE BUZZ

Star Business reported that M&A talks have begun in thetelecommunications space. It highlighted industry sources that one of the moreactive players pursuing a M&A exercise was the YTL group which hasapproached Asiaspace and Green Packet.  Asiaspace'sChairman indicated that 'consolidation was the most logical thing to do as capexis so high for the industry'.

OUR TAKE

The fight forsurvival. The developments do not surprise us as we had highlighted in thepast that a consolidation among the smaller telcos is a foregone conclusion, asmost lack the scale, operational track record and financial resources tocompete with the incumbents. This is also consistent with the government's callfor the sharing of network resources in minimizing duplication, both onactive/passive infrastructure where various partnerships have already beenforged among the incumbents and the smaller telcos.

4 WiMAX players eyed.We expect the consolidation theme to be strongest within the 4 smallercompanies ' YTL, Communications, P1 Networks, Redtone and  Asiasapace 'awarded the 2.6GHz spectrum asthis is a condition implicit in the provisional allotment of the licences tothe operators last year. Of the four, P1 was the earliest to roll out its WiMaxservice on the previously awarded 2.3GHz spectrum in 2008. YTL launched its wirelessbroadband service in Nov 2010, while Redtone and Asiaspace only managed selectiverollouts with patchy services reported. We see greatest upside from the merger betweenYTL Communications and P1 as both have a decent base of subscribers as well ascommand decent network coverage with potential for revenue and cost synergies.

NEUTRAL on thesector. We are retaining our sector call given that valuations are not attractivewhen stacked against regional comparables, albeit the local sector is supportedby the decent dividend yields of the telcos. Our top pick in the sector remainsAXIATA (BUY, FV: RM5.60) and TM (BUY, FV: RM5.50), given their strongerearnings outlook and potential for active capital management. We maintain ourNEUTRAL ratings on both Digi and Maxis with Fair  Values of RM4.00 and RM5.10respectively as the recent share price re-ratings of both stocks have probablyfactored in various positive operational and dividend themes for now. Digi andMaxis trades at FY13 PERs of 18-20x, which are at a premium to those ofregional mobile operators.   


Source: OSK188