TM poised to gain from IPTV


  • Business
  • Wednesday, 11 Apr 2012

TELECOMMUNICATIONS SECTOR

By OSK Research

Neutral

Telekom Malaysia Bhd (TM) is well placed to benefit from the shift to IPTV (Internet protocol television) services as it has crafted a good strategy to build up its Internet and data businesses, and is executing well on Unifi.

We keep our buy call on TM based on the higher fair value of RM5.90 (previously RM5.70), following the 2% to 4% upgrade to our financial years 2012/2013 forecasts.

The battle for viewership and eyeballs is heating up in Malaysia's nascent IPTV space.

Cable pay-television operator Asian Broadcasting Network (ABN), slated to roll out its service in the second quarter of 2012, is taking on Astro, which is reportedly seeking to re-list.

ABN is targeting 500,000 subscribers within the first year of roll-out and three million subscribers in three years, and will be investing RM2bil over 10 years to cover six million households.

ABN's entry is likely to be a threat to Astro as it is vying for a similar addressable market.

In addition to ABN, YTL Communication was also reported to be targeting an IPTV product based on a partnership with Sezmi Corp, a US pay-television operator but there have been no updates since.

We expect the IPTV theme to catch on in tandem with the triple-play propositions from TM and Maxis Bhd as broadband becomes increasingly “commoditised”.

We think Astro's homecoming IPO (initial public offering) will spice up the convergent theme in the industry and incite talks of a merger with Maxis again.

Meanwhile, P1's and Maxis' fiber plans are without IPTV and we think not a threat to TM, which has enjoyed first-mover advantage.

We see TM as one of the best ways to play the convergent theme and is a beneficiary of the rekindled interest in the fixed line business.

We believe TM's target of 400,000 Unifi subscribers by end-2012 is conservative as it had achieved 80% of the number in early April.

The strong momentum of weekly subscriber adds of six thousand from the fourth quarter of financial year 2011 (Q4FY11) does not appear to be slowing despite a competing product from Maxis and as TM reaches out to the remaining 150,000 to 200,000 premises to be passed under the agreement with the Government.

We do not rule out TM procuring more compelling content to shore up interest on its IPTV product in driving Unifi's next leg of growth.

TM may also turn more aggressive on popular content to strengthen its triple play value proposition.

It has a strong balance sheet and an expanding cash hoard from peaking high speed broadband investments to mount a challenge should it decide to bid for content, ring-fenced by Astro as regulatory developments are in its favour.

The strategy is akin to the content challenge mounted by SingTel on StarHub in Singapore in a bid to strengthen its quad play service.

Acquiring fresh content would allow TM to progressively expand its household ARPU (average revenue per user) through up-selling of more premium service and is key to locking in subscribers over the longer term in the face of stronger competition from existing and new players.

TM's reciprocal agreement with Celcom allows it to launch a mobile virtual network operator (MVNO) brand that could transform the company into a quad play operator.

In view of the stronger than expected subscriber growth for Unifi, we are raising our Unifi subscriber projections for financial year 2012 and 2013 respectively by 26% and 24% to 501,000 and 741,000 (from 399,000 and 599,000 previously).

Petronas Dagangan Bhd

By CIMB Research

Outperform (maintain)

Target price: RM21.80

Our communication with management and recent developments suggest that it is all systems go for Petronas Dagangan (PetDag) in its drive to become an all-around leader in four years.

All units retail, lubricant, LPG (liquefied petroleum gas) and commercial are revved up and on an accelerated growth path.

Its net profit is fast approaching the RM1bil mark this year, making it the most profitable company among the 32 listed oil and gas entities in Malaysia.

We project new net profit highs in financial years 2012 to 2014.

This translates into a three-year earnings per share compounded annual growth rate (EPS CAGR) of 14.6%, which is commendable for a pure downstream company.

The growth will be led primarily by the retail business which consists of Petronas petrol stations and Kedai Mesra convenience stores.

The company takes the top spot in the LPG and commercial segments but is No. 2 behind Shell in the retail and lubricant segments.

In the final nine months of 2011, the retail business, whose main products are petrol and diesel, contributed 63% to revenue and 77% to gross profit. As at the end of January 2012, PetDag operated 971 petrol stations. Its market share stands at 31%.

The number of stations is expected to exceed 1,000 by the third quarter of 2012.

This aggressive expansion is aimed at taking over Malaysia's retail leadership from Shell, which has 35% of the market.

Market position is measured by sales volume.

In 2011, PetDag's retail sales volume amounted to an estimated 6.4 billion litres compared with around 7.2 billion litres for Shell.

PetDag's capital expenditure for financial year 2012 will be about RM500mil, which will be spent mostly on the new stations and the upgrade of existing ones.

Also, last year, PetDag undertook an initiative targeted at increasing the traffic at its stations by introducing the auto spa facility, which complements the products and services offered at the pumps and Kedai Mesra.

Meanwhile, lubricant products is PetDag's smallest business, contributing 1% of group revenue in the final nine months of 2011.

However, given its high margin, lubricant products accounted for 5% of gross profit.

To become the No. 1 player for lubricant products in Malaysia, PetDag needs to have a market share of at least 31%.

It plans to do this by aggressively promoting its products to workshops, service centres and car manufacturers and dealers such as Proton, Chevrolet, Cycle and Carriage and Perodua.

In March 2012, PetDag signed a RM225mil deal to supply Perodua with lubricant oil over the next five years and also sealed a five-year contract with Konsortium Logistik Bhd (KLB) for the supply of synthetic grade engine oil for KLB's prime movers and vehicles.

The deal makes PetDag as KLB's exclusive partner and supplier of lubricants.

Meanwhile, for the LPG segment, PetDag has launched Gas Petronas Home Delivery, a convenient way of ordering LPG (cooking gas) cylinder variants through a nationwide hotline number.

It is the first retailer to have a central and dedicated phone line for LPG deliveries.

In the commercial segment, PetDag is tops with the main product being jet fuel.

The company now counts Emirates among its jet fuel customers and benefits from the airline's daily, non-stop A-380 flights to KLIA (Kuala Lumpur International Airport).

Also, to keep up with the increasing demand from the low-cost segment, PetDag is installing a new fuel hydrant system at KLIA2.

Investors have responded warmly to PetDag's dividend policy of 55% and quarterly dividend payments.

The policy is indicative of the company's sustainable growth prospects and cements its status as an attractive and reliable dividend play.

It also makes the stock excellent holding for investors with a longer term investment horizon.

PetDag's dividend yield tops the oil and gas list locally.

Perisai Petroleum Teknologi Bhd

By Maybank IB Research

Buy (unchanged)

Target price: RM1.13

We remain positive on Perisai's growth prospects, management focus and balance sheet strength.

It could next feature in Malaysia's FPSO (floating production, storage and offloading vessel) scene with major shareholder Ezra Holdings Ltd as it seeks to leverage on Ezra's financial muscle and experience.

Recall that Hess Corp has given a letter of intent to Ezra's unit, Emas Offshore, to charter an FPSO for the North Malay basin field.

A successful FPSO partnership with Ezra would catapult Perisai onto a new growth path.

Perisai is also committed to expanding its asset base as it explores avenues for growth.

It will focus predominantly on Malaysia as it capitalises on Petronas “import substitution” opportunities.

The core parameters for potential acquisition targets include that the income-generating assets be sizeable (for example, US$100mil or RM307.8mil each), which would create a high barrier to entry and low competition base with rewarding returns.

Meanwhile, Perisai is known to be risk and balance sheet-conscious and will not enter into any speculative asset orders.

The size of its balance sheet and opportunities ahead will dictate the pace of its growth.

While Perisai remains tight-lipped on its business plans, we do not rule out the possibility of Perisai venturing into the floating solutions business, subsea services-related assets or drilling rig space - all of which fit its investment criteria.

With a low net debt of RM224mil translating to net gearing of 0.7 times, Perisai could leverage up by a further RM500mil while still keeping its net gearing level below the 1.5 times threshold.

Perisai could also ride on on Ezra's experience and skill sets in the floating solutions and subsea services spaces.

Management has clarified that Perisai is the preferred (but not exclusive) partner and distribution channel for Ezra in the Malaysia oil and gas market.

Earnings are set to quadruple in 2012, as it fully recognises contributions from its MOPU (mobile offshore production unit) charter, which will account for 65% of net profit.

Valuations are cheap, as the stock trades at one to two times EV/EBITDA (enterprise value/earnings before interest and tax, depreciation and amortisation) and single-digit prospective PERs (price earnings ratio).

Our 11 times 2013 PER target is consistent with the average for peers with a market cap of under RM1bil.

Also, Perisai managing director Zainol Izzet Mohamed Ishak has exercised an option to acquire 66 million Perisai shares at 48.5 sen per share granted to him by HCM Logistics Ltd, a subsidiary of Ezra.

Upon the completion of the exercise, Zainol Izzet will be the fourth largest shareholder of Perisai with a 7.7% stake.

We view this positively, as it will strengthen Zainol Izzet's commitment to taking Perisai to a higher level.

Guan Chong Bhd

By HwangDBS Vickers Research

Buy (maintained)

Target price: RM3.20

Guan Chong has proposed a secondary listing on the Main Board of Singapore Stock Exchange via a public issue of up to 31 million new shares and an offer for sale of up to 31 million existing shares.

These shares which translate to 17.7% of an enlarged share base of 350 million shares will be fully fungible with the shares currently traded in Malaysia when the listing exercise is completed in July or August.

Together with a one-for-two bonus issue (post secondary listing), the proposal will improve trading liquidity, widen shareholders' base and boost valuation.

Assuming an indicative issue price at RM2.80, the issue will raise RM86.8mil proceeds (to be used mainly for working capital needs).

Based on an enlarged share base of 350 million, our basic earnings per share (EPS) could see dilutions of 2.9% for financial year 2012 (four-month impact) and 8.6% for financial year 2013 (full-year impact).

Meanwhile, the exercise (assuming a maximum scenario of 62 million shares to be offered) will dilute major shareholder Tay family's combined stake from 61.7% to 52.9%.

The secondary listing may enable Guan Chong to narrow its valuation gap with Singapore-listed peer Petra Food (current 2012 price earnings of 14 times versus Guan Chong's 7 times).

Thus, we have tagged a higher target price earnings of 10 times (from 8 times) on Guan Chong's adjusted financial year 2012 forecast fully diluted earnings per share, translating to a target price of RM3.20 (from RM2.80).

We maintain our buy call, with a potential upside of 19% (including dividend returns).

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