KUALA LUMPUR: UOB Kay Hian Malaysia Research has upgraded the telecommunication sector to Overweight from Market Weight on expectations of stable earnings, sustainable dividend and attractive valuations.
The research house said on Monday it expects stable earnings (relative to market), sustainable dividend and attractive valuations. Its top picks are Axiata and Digi.
“The sector is currently trading at 24 times FY20F price-to-earnings (PE) and seven times FY20F enterprise value/earnings before interest, tax, depreciation and amoritsation (EV/Ebitda).
“Backtesting suggests that telcos have outperformed the FBM KLCI by 10% to 40% in the past crisis, ” it said.
UOB Kay Hian Research said in the 1997 Asian Financial Crisis, Telekom Malaysia (before the de-merger of Axiata) outperformed the market by 20%-40% within a six months period.
During the 2003 SARS period, the sector traded in line with the market. It believed this was due to infancy of the sector (for wireless players like Maxis and Digi) and therefore, lack of dividends.
In the 2008 Global Financial Crisis, the sector outperformed the market by 10-30%, led by the defensive Digi and Maxis.
Axiata however, underperformed the market due to US$ debt worries (as the company had been aggressive in its overseas market expansion back then).
“Telecommunications spend is deemed essential with service revenue accounting for less than 2% of GDP. As such, we expect telecommunication earnings to remain resilient (relative to market) as the world roils in a COVID-19 induced recession.
“For one, limited travel restrictions will lead to lower roaming charges but this is limited to around 5% of service revenue. Secondly, the prepaid market will experience physical distribution channel disruptions but this will be partly mitigated by digital deliveries.
“Lastly, we gathered that data traffic has increased 10-15% as a result of the lockdown. In these difficult times, our base case assumes telcos will not actively monetise data growth but rather, undertake CSR to win over customers in the longer run via free off-peak data or selective data usage, i.e. school or social media applications. This will help boost customer stickiness and lower churn in the longer run, ” it said.
UOB Kay Hian Research pointed out CSR measures announced by telcos include 1GB of free daily data for consumption between 8am and 6pm (for existing post-paid and prepaid customers).
At this juncture, the government’s main priority includes keeping the telco network running and aiding corporates/SMEs.
As such, the research house takes the view that the 5G roll-out will take a momentary backseat (government have previously scheduled for a 5G roll-out by 3Q20).
“We note that the Big 3 telcos (Celcom Digi, and Maxis) have agreed to jointly explore fibre infrastructure sharing to further enhance 4G networks and accelerate 5G deployment.
“We view this positively as it could lead to up to 35% of cost savings if telcos decide to share both active (radio access network) and passive infrastructure (fibre backhaul and site sharing). This bodes well for sector ROIC (of 7% for FY20) as telcos prepare for the next technology phase.
“Our top picks are Axiata and Digi. Telecommunications spend is deemed essential with service revenue accounting for less than 2% of GDP.
“The Covid-19 lockdown will have an adverse impact on roaming revenue and prepaid channel distribution but pedestrian sector earnings (+1% yoy) suggests limited earnings downside vs the broader market, ” UOB Kay Hian Research said.
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