Telco - overall - 2015: A year to tread carefully
Recommendation: Neutral
Competition is likely to be intense in two out of the four markets we cover. Capex Cshould also stay high as telcos invest further in rolling out 3G/4G networks and improving the data experience. Strong mobile data revenue growth is a bright spot but this will be partly offset by SMS/voice revenue declines, especially in the more developed markets. ASEAN telcos’ share prices have also done fairly well, up 14.4% YTD and 52.2% since 2011 on average, reducing the odds of further sector-wide outperformance in 2015. We remain Overweight on Indonesia and Neutral on Singapore and Thailand while cutting Malaysia from neutral to Underweight. Our top picks are Telkom Indonesia, SingTel and Thaicom. We downgrade DiGi to Hold and upgrade Indosat to Add.
ASEAN telcos’ share prices have also done fairly well, up 14.4% YTD and 52.2% since 2011 on average, reducing the odds of further sector-wide outperformance in 2015. We remain Overweight on Indonesia and Neutral on Singapore and Thailand while cutting Malaysia from neutral to Underweight. Our top picks are Telkom Indonesia, SingTel and Thaicom. We downgrade DiGi to Hold and upgrade Indosat to Add.
Indonesia & Singapore preferred
Indonesia, in our view, has the best growth prospects and is our preferred ASEAN telco market for 2015. We forecast high-single-digit mobile revenue growth, driven by fast-rising mobile data consumption, improving voice/SMS tariffs and stable competition. Tower companies are also in a good position to benefit from continued 3G network rollouts by Indonesian telcos. Singapore is our second most preferred market. Tariff hikes implemented in Sep 2014 should help to boost the industry’s mobile revenue growth over the next two years amid stable competition.
Thailand and Malaysia face intense competition
We see intense mobile competition persisting in Thailand in 2015 due to the likely delay in the 1800/900MHz spectrum auctions and continued aggressiveness by True to gain market share as it leverages its spectrum advantage. We believe Thai telcos will have to spend more capex and opex in order to accommodate the explosion in data consumption and defend their market positions. We are more positive on the non-mobile space as we see strong growth potential for the satellite and fixed broadband businesses. For Malaysia, we expect competition to intensify in 2015 as smaller players strive to build scale while bigger players such as Maxis and Celcom try to regain market traction after their poor performance in 2014. This will crimp some of the positive effects from passing on the 6% GST to prepaid subscribers starting Apr 2015. We see also capex staying high as Malaysian telcos accelerate their 4G network rollout.
Key topical issues analysed
Spectrum refarming could take place in Malaysia by end-15, with possibly negative medium- to longer-term implications. In Singapore, we think it is possible but unlikely that a fourth mobile operator will enter the market. We take a look at how a merged Hutch-Indosat entity may look like and other possible M&As in Indonesia. For Thailand, the resurrection of political risk is likely to be detrimental to sector liberalisation, with emphasis on SOEs’ interest likely to come at the expense of the Thai telcos.
EV/OpFCF offers a better valuation measure
We use EV/operating FCF (OpFCF) to compare valuations across the region as it takes into account the different capex/sales in each market. Average 3-year forward capex is used to smooth out annual fluctuations. On this measure, TLKM trades at 11.8x and Thaicom at 6.7x, which are below the sector average. Although SingTel’s EV/OpFCF of 16.0x is above the sector average, it is still 9% below the average for major telcos in the region.
Source: CIMB Daybreak - 20 November 2014
Recommendation: Neutral
Competition is likely to be intense in two out of the four markets we cover. Capex Cshould also stay high as telcos invest further in rolling out 3G/4G networks and improving the data experience. Strong mobile data revenue growth is a bright spot but this will be partly offset by SMS/voice revenue declines, especially in the more developed markets. ASEAN telcos’ share prices have also done fairly well, up 14.4% YTD and 52.2% since 2011 on average, reducing the odds of further sector-wide outperformance in 2015. We remain Overweight on Indonesia and Neutral on Singapore and Thailand while cutting Malaysia from neutral to Underweight. Our top picks are Telkom Indonesia, SingTel and Thaicom. We downgrade DiGi to Hold and upgrade Indosat to Add.
ASEAN telcos’ share prices have also done fairly well, up 14.4% YTD and 52.2% since 2011 on average, reducing the odds of further sector-wide outperformance in 2015. We remain Overweight on Indonesia and Neutral on Singapore and Thailand while cutting Malaysia from neutral to Underweight. Our top picks are Telkom Indonesia, SingTel and Thaicom. We downgrade DiGi to Hold and upgrade Indosat to Add.
Indonesia & Singapore preferred
Indonesia, in our view, has the best growth prospects and is our preferred ASEAN telco market for 2015. We forecast high-single-digit mobile revenue growth, driven by fast-rising mobile data consumption, improving voice/SMS tariffs and stable competition. Tower companies are also in a good position to benefit from continued 3G network rollouts by Indonesian telcos. Singapore is our second most preferred market. Tariff hikes implemented in Sep 2014 should help to boost the industry’s mobile revenue growth over the next two years amid stable competition.
Thailand and Malaysia face intense competition
We see intense mobile competition persisting in Thailand in 2015 due to the likely delay in the 1800/900MHz spectrum auctions and continued aggressiveness by True to gain market share as it leverages its spectrum advantage. We believe Thai telcos will have to spend more capex and opex in order to accommodate the explosion in data consumption and defend their market positions. We are more positive on the non-mobile space as we see strong growth potential for the satellite and fixed broadband businesses. For Malaysia, we expect competition to intensify in 2015 as smaller players strive to build scale while bigger players such as Maxis and Celcom try to regain market traction after their poor performance in 2014. This will crimp some of the positive effects from passing on the 6% GST to prepaid subscribers starting Apr 2015. We see also capex staying high as Malaysian telcos accelerate their 4G network rollout.
Key topical issues analysed
Spectrum refarming could take place in Malaysia by end-15, with possibly negative medium- to longer-term implications. In Singapore, we think it is possible but unlikely that a fourth mobile operator will enter the market. We take a look at how a merged Hutch-Indosat entity may look like and other possible M&As in Indonesia. For Thailand, the resurrection of political risk is likely to be detrimental to sector liberalisation, with emphasis on SOEs’ interest likely to come at the expense of the Thai telcos.
EV/OpFCF offers a better valuation measure
We use EV/operating FCF (OpFCF) to compare valuations across the region as it takes into account the different capex/sales in each market. Average 3-year forward capex is used to smooth out annual fluctuations. On this measure, TLKM trades at 11.8x and Thaicom at 6.7x, which are below the sector average. Although SingTel’s EV/OpFCF of 16.0x is above the sector average, it is still 9% below the average for major telcos in the region.
Source: CIMB Daybreak - 20 November 2014
