DIGI (6947) : Telco - overall - Showered with love
Recommendation: Neutral
Our month-long Asia marketing trip revealed that investors are neutral to overweight on ASEAN telcos, largely due to their defensive qualities amid rising risk-aversion. This contrasts with our overall Neutral sector stance, which is based on the potential emergence of competitive/regulatory risks and fair-to-rich valuations after a 4-year bull run. We prefer Indonesia the most and Malaysia the least. Top picks: Telkom Indonesia, SingTel and Thaicom.
What Happened
Over the past one month, we met 87 fund managers and analysts in Kuala Lumpur, Hong Kong, Singapore and Bangkok to market our 2015 outlook for ASEAN telcos. During the meetings, we presented our view that 2015 will be a challenging year due to risks of more competition, elevated capex and negative regulatory/political developments. We highlighted that we are most positive on 1) Indonesia due to its strong growth prospects, driven by mobile data and relatively stable competition, and 2) the non-mobile space in Thailand given the growth potential for satellite and fixed broadband. For Malaysian telcos, we believe that the positive GST impact has already been priced in but probably not the potential negative effects from more intense competition. Due to regulatory uncertainties and intense competition, we are less positive on the Thai mobile operators in the short term. Lastly, we discussed why we think that a fourth mobile entrant into Singapore is unlikely to happen.
What We Think
Investors, especially those in Malaysia, were generally neutral to overweight on the sector due to rising risk-aversion. Despite the fair-to-rich valuations and potential negative market/regulatory developments, investors saw greater risks in other sectors due to the recent plunge in oil prices, currency selloffs and weak consumer sentiment. Investors often asked whether we prefer the Indonesian telcos or tower companies. We like the structural tower demand story as telcos clearly need to further expand their 3G coverage over the next 3-5 years. In addition, there are opportunities to acquire more towers from the mobile operators. Nevertheless, in view of their fair valuations (TBIG) and limited trading liquidity (TOWR, SUPR), we believe Indonesian telcos make better investments over the next 12 months. For Thai telcos, investors were receptive to 1) our valuation call on DTAC, whose share price is over-penalised and trading at a 25% discount to AIS in terms of FY15 EV/Op FCF, 2) Jasmine’s capital management story from JASIF's listing, and 3) Thaicom's ability to benefit from SD-to-HD conversion, boosting demand for its satellite transponders. Most investors agreed with our top picks: Telkom Indonesia, SingTel and Thaicom. The main pushbacks were capex risk for Telkom, forex risks for SingTel and concerns over the government’s National Satellite project for Thaicom.
What You Should Do
We are Overweight on Indonesia, Neutral on Singapore/Thailand and Underweight on Malaysia. We prefer Telkom Indonesia as it is well positioned to capture the strong data demand in Indonesia and has the greatest scope to benefit from tariff adjustments. We also like SingTel as we expect stronger Optus performance and continued recovery in associate earnings in FY16-17. Meanwhile, Thaicom is clearly a growth and value play with 36% FY15 EPS growth and 15x FY15 P/E. We also think investors should not miss JAS given its potential special DPS of THB1-2 from the JASIF IPO. We recently downgraded DiGi to Hold due to risk of more intense competition in the Malaysian market.
Source: CIMB Daybreak - 18 December 2014
Recommendation: Neutral
Our month-long Asia marketing trip revealed that investors are neutral to overweight on ASEAN telcos, largely due to their defensive qualities amid rising risk-aversion. This contrasts with our overall Neutral sector stance, which is based on the potential emergence of competitive/regulatory risks and fair-to-rich valuations after a 4-year bull run. We prefer Indonesia the most and Malaysia the least. Top picks: Telkom Indonesia, SingTel and Thaicom.
What Happened
Over the past one month, we met 87 fund managers and analysts in Kuala Lumpur, Hong Kong, Singapore and Bangkok to market our 2015 outlook for ASEAN telcos. During the meetings, we presented our view that 2015 will be a challenging year due to risks of more competition, elevated capex and negative regulatory/political developments. We highlighted that we are most positive on 1) Indonesia due to its strong growth prospects, driven by mobile data and relatively stable competition, and 2) the non-mobile space in Thailand given the growth potential for satellite and fixed broadband. For Malaysian telcos, we believe that the positive GST impact has already been priced in but probably not the potential negative effects from more intense competition. Due to regulatory uncertainties and intense competition, we are less positive on the Thai mobile operators in the short term. Lastly, we discussed why we think that a fourth mobile entrant into Singapore is unlikely to happen.
What We Think
Investors, especially those in Malaysia, were generally neutral to overweight on the sector due to rising risk-aversion. Despite the fair-to-rich valuations and potential negative market/regulatory developments, investors saw greater risks in other sectors due to the recent plunge in oil prices, currency selloffs and weak consumer sentiment. Investors often asked whether we prefer the Indonesian telcos or tower companies. We like the structural tower demand story as telcos clearly need to further expand their 3G coverage over the next 3-5 years. In addition, there are opportunities to acquire more towers from the mobile operators. Nevertheless, in view of their fair valuations (TBIG) and limited trading liquidity (TOWR, SUPR), we believe Indonesian telcos make better investments over the next 12 months. For Thai telcos, investors were receptive to 1) our valuation call on DTAC, whose share price is over-penalised and trading at a 25% discount to AIS in terms of FY15 EV/Op FCF, 2) Jasmine’s capital management story from JASIF's listing, and 3) Thaicom's ability to benefit from SD-to-HD conversion, boosting demand for its satellite transponders. Most investors agreed with our top picks: Telkom Indonesia, SingTel and Thaicom. The main pushbacks were capex risk for Telkom, forex risks for SingTel and concerns over the government’s National Satellite project for Thaicom.
What You Should Do
We are Overweight on Indonesia, Neutral on Singapore/Thailand and Underweight on Malaysia. We prefer Telkom Indonesia as it is well positioned to capture the strong data demand in Indonesia and has the greatest scope to benefit from tariff adjustments. We also like SingTel as we expect stronger Optus performance and continued recovery in associate earnings in FY16-17. Meanwhile, Thaicom is clearly a growth and value play with 36% FY15 EPS growth and 15x FY15 P/E. We also think investors should not miss JAS given its potential special DPS of THB1-2 from the JASIF IPO. We recently downgraded DiGi to Hold due to risk of more intense competition in the Malaysian market.
Source: CIMB Daybreak - 18 December 2014
