Solid 4Q results for telecoms players

by **Cals** Tue 11 Mar 2014, 11:31

Business & Markets 2014

Written by RHB Research

Tuesday, 11 March 2014 09:38

Telecommunications sector
Maintain neutral: Four out of the five companies under our coverage — Axiata Group Bhd, Maxis Bhd, DiGi.Com Bhd and Time dotCom Bhd (TdC) — reported results that were within our expectations. Telekom Malaysia Bhd, however, sprang a positive surprise due to higher than expected tax incentives.

Consensus revised DiGi’s financial year 2014 ending Dec 31 (FY14) earnings higher by 3%, as management guided that its old network was fully decommissioned in the third quarter (3Q) of FY13, which implies lower depreciation charges in 2014.

Consensus also lifted Telekom’s FY14 ending Dec 31 earnings by 4.9%, which we think reflects the group’s stronger than expected FY13 results.

Axiata and Maxis both saw slight downgrades in earning forecasts on expectation of lower earnings before interest, tax, depreciation and amortisation (Ebitda) margins. Maxis only guided for absolute core Ebitda to be similar to that in FY13.

The sector’s overall 4Q sequential revenue growth was helped by a seasonally strong quarter for Telekom (+14.1%), mainly due to lumpy customer projects. The cellular companies had a relatively muted quarter, as short messaging service (SMS) revenue continued to be eroded by rising over-the-top (OTT) usage, although DiGi fared better than its peers.

Their Ebitda margins were generally weaker as Maxis incurred higher marketing expenses while Celcom Axiata Bhd experienced higher handset subsidies.

Telekom’s Ebitda margin contracted slightly owing to content and high-speed broadband (HSBB) maintenance costs. As expected, TdC’s Ebitda margin improved quarter-on-quarter following several one-off costs in 3Q and the recognition of the remaining higher margin non-recurring node fiberisation contracts worth RM4.2 million in 4Q.

Following our recommendation upgrades to “buy” on both DiGi and TdC, we upgrade the sector to “neutral” from “underweight”. Maxis is our only “sell” call currently.

We note that OTT applications continue to have a negative material impact on SMS revenue, which makes it difficult for the companies to sustain high data growth going forward (SMS is a component of data, along with mobile internet and value-added services). In this respect, we find that based on FY13 results, DiGi monetised data most effectively, with the added bonus of keeping its traditional voice revenue stable (versus marginal declines among its peers). — RHB Research, March 10

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This article first appeared in The Edge Financial Daily, on March 11, 2014.