Time dotCom to gain from high demand


Kenanga says the local banking groups will continue to do well in the current conducive banking .system

TIME Dotcom Bhd

By OSK Investment Research

Fair value: RM4.98

Buy

AS highlighted in our results review note on Nov 30, Time dotCom Bhd's third quarter ended Sept 30, 2012 indefeasible rights of use (IRU) sales were lower quarter-on-quarter, which led to the flat topline and bottomline.

At its results conference call, management attributed the lack of IRU sales to capacity upgrade on its Unity Cable System as the group is migrating over to 40G cards (from 10G previously) to meet rising demand for bandwidth, especially the connectivity from South-East Asia to Japan and the onward link to the United States.

We expect IRU sales to rebound in the next two quarters, lifting margins in turn.

Also, to further augment its IRU offerings, Time had earlier joined the Asia-Pacific Gateway consortium to construct a submarine cable system which is expected to be completed by financial year (FY) 2014.

Even though management did not explicitly express its intention to aggressively tap into the consumer and small and medium enterprise segment, we sense that Time may be moving towards that direction to milk its fibre assets more extensively.

This may be supported by the following factors: it tied up with Astro to launch IPTV services; collaborated with Setia Haruman Technology Sdn Bhd to introduce fibre services in Cyberjaya; lowered price points across all of its fibre plans; and increased marketing and advertising campaigns in the past two quarters.

Although this segment is low-yielding in nature compared to the wholesale and corporate segments, we see no material impact to margins given that it contributes less than 10% to total revenue.

We are raising our FY12/FY13 core earnings forecasts by 11% and 2% respectively following some housekeeping adjustments and also factoring in higher dividend income from its investment in Q4.

All in, Time sum of parts fair value (FV) is bumped up to RM4.98 given our recent revision in DiGi's FV from RM4.07 to RM5. We continue to see value in Time given the rising demand for bandwidth and are reiterating our “buy” recommendation on the stock.

BANKING SECTOR

By Kenanga Research

Overweight (Maintain)

THE third quarter results for Malaysian banks were mostly in line with consensus and our own expectations.

Much like the earlier quarter, lower-than-expected credit cost was the earnings driver amid slower top line growth.

The results for dark horses picks, namely, Affin and BIMB, were above expectations while the performances of the other banks under our coverage (Maybank, CIMB, Public Bank, Hong Leong Bank, AMMB, AFG and RHBCap) were in line.

The cumulative year-to-date earnings grew by 15.6% year-on-year.

Given our view that responsible finance will promote a healthier household lending portfolio, the momentum of loans growth will be lower for the period 2012 to 2013 and hence our base case for the system loan growth is maintained broadly in the low teens of only 10% to 12%.

Together with the ongoing margin headwinds and limited provisioning tailwinds, there are limited opportunities to drive earnings growth here materially beyond our current expectations of a high single-digit growth.

With earnings growth in the range of high single-digit to low teens, together with the already tight valuation, we believe a valuation multiple expansion is also unlikely.

The major banks' valuations are currently trading near the average of their historical valuation ranges, which are considered “fair”.

Hence, this will somewhat cap the absolute share price performance of banking stocks apart from the pressure weighed on them by the present uncertain external economic outlook.

Overall, we believe that the local banking groups will continue to do well in the current conducive banking system with their strong balance sheets and steady earnings. We are maintaining our “overweight” call on the sector.

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