Telcos to outperform this year as investors seek earnings stability

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Telecommunications sector
Maintain overweight:
Mobile service revenue is unlikely to have registered growth in 2014, owing to monetisation challenges faced by both Maxis Bhd (organisational restructuring and fixing its prepaid business) and Celcom Axiata Bhd (unstable IT systems). As we head into 2015, mobile revenue growth should resume as operators overcome monetisation challenges and potentially benefit from the goods and services tax (GST).

Meanwhile, the competitive intensity in the mobile space would likely increase going forward, as 1) U Mobile Sdn Bhd maintains its pursuit of revenue share, and 2) Telekom Malaysia Bhd (TM)-P1 prepares to roll out long-term evolution services. For now, the big three remain cognisant of the need to not compete on pricing.

Sector valuations remain uncompelling (both DiGi.Com Bhd and TM set new enterprise value over earnings before interest, taxes, depreciation and amortisation [EV/Ebitda] highs in 2014), but as we repeatedly noted in the past, telecoms are increasingly becoming liquidity proxies. As general risk aversion sets in, we expect the telecoms sector to outperform in 2015 as investors gravitate towards sectors with strong earnings stability.

Our preferred sector picks are Axiata Group Bhd and Maxis, essentially the laggards of 2014. Both went through operational hiccups in 2014, and thus underperformed their peers. However, operations for both look set to normalise heading into 2015, and we expect their share prices to be rerated. Conversely, DiGi, TM and Time dotCom Bhd are all trading near peak valuations given their strong share price run-up in 2014. Thus we see limited near-term upside for these stocks. — Maybank IB Research, Jan 2



This article first appeared in The Edge Financial Daily, on January 5, 2015.