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Oct 2009: Maxis IPO shares relatively attractive
• Upside to Maxis shares limited to RM6.35 Assuming investors are unsuccessful in subscribing for Maxis’ IPO shares, we believe the shares begin to look stretched above RM6.35 in the secondary equity market. Maxis IPO shares look relatively attractive at an IPO price of RM5.20 per share, implying a PE multiple of 15.5x (a marginal discount to DiGi’s 16.7x) based on FY10 EPS of 33.6 sen.
• Astro wins EPL rights; not clear if TM submitted bid Without too much of a surprise, Astro won the rights to broadcast the 2010-2013 English Premier League (EPL) football matches for a sum reported to be over US$250m (RM855m). It is unclear if Telekom Malaysia
ubmitted a bid for the rights, but we are positive that TM did not enter into a bidding war with Astro despite having the war chest to do so, preferring instead the company return excess cash to shareholders
• Red hot competition in India
EBITDA margins and earnings growth of telco stocks in India, including Axiata’s associate is expected to be under further pressure in the short to medium term as competition continues to escalate. Mobile operators will find it increasingly difficult to maintain high earnings growth, as Bharti Airtel showed with its disappointing 2QFY10 results.
• DiGi’s 3QFY09 results review
DiGi’s 9MFY09 results were within house and consensus expectations. Besides declaring a special net dividend of 75 sen/share, it revised its dividend pay-out policy from 50% to a minimum 80% due to strong cash flow and a solid balance sheet. The move to raise its minimum pay-out may be in response to the impending listing of Maxis which is promising a minimum pay-out of 75%, and possibly 85% if market talk is true • Global developments Notable global developments include the official arrival of the iPhone in China, handset subsidies hurting Sprint’s profitability and forecasts that the telecom equipment sector will return to low single-digit growth next year.
MALAYSIA CORPORATE NEWS
Upside to Maxis shares limited to RM6.35
Assuming some investors are unsuccessful in subscribing for Maxis’ IPO shares, we believe Maxis IPO shares begin to look stretched above RM6.35 in the secondary equity market. If a 15% premium is accorded to DiGi’s valuation, Maxis may trade up to RM6.35 post-IPO, but forward PE multiples look expensive at 19.0x based on FY10 EPS of 33.6 sen and dividend yields look rather modest at 4.0%.
Maxis will be listed at an IPO price of RM5.20 per share. This implies Maxis will command a PE multiple of 15.5x (a marginal discount to DiGi’s 16.7x) based on FY10 EPS of 33.6 sen. Quite likely Maxis may command a premium over DiGi given its market leadership and larger market capitalisation. Assuming a 15% premium is accorded to Maxis based on DiGi’s forward PE multiple of 16.7x, Maxis may trade up to RM6.35 based on a PE multiple of 19.0x. However, valuations look pricey at those levels
At an IPO price of RM5.20, Maxis’ dividend yields are decent at 4.8%, based on prospective FY10 DPS of 25.2 sen assuming a payout ratio of 75%. While such yields are still lower than DiGi’s (5.6%) and TM (6.4%), there is a possibility Maxis may increase its dividend payout ratio due to strong free cash flows.
There has been market talk that Maxis may increase the payout ratio to 85%. If this materialises, this will increase our FY10 DPS estimates by 3.4 sen to 28.6 sen, whereby dividend yields will increase to 5.5% - very similar to DiGi’s.
Our back of the envelope estimates forecast Maxis FY10 EPS of 33.6 sen. Our forecast assumes EBIT growth of 5.4% in 2010 from annualised 2009 figures. Maxis needs to achieve such EBIT growth to offset new finance charges amounting to about RM185m from next year onwards. Consequently, on a net income basis, Maxis’ growth will be flat from FY09 to FY10. The new finance charges are a result of borrowing RM5bn next year to repay the holding company, Maxis Communications Bhd under the pre-listing exercise.
Astro wins EPL rights; not clear if TM submitted bid
Without too much of a surprise, Astro won the rights to broadcast the 2010-2013 English Premier League (EPL) football matches for a sum reported to be over US$250m (RM855m), according to The Edge Financial Daily on Oct 8. It is not clear if Telekom Malaysia (TM) had submitted a bid for the rights, but one can surmise that TM did make a bid, but not a very serious one.
The Edge Financial Daily did not mention that TM made a bid, but an Astro statement that the rights cost the company a “higher price than anticipated” as “competitive environment drove the rights up” suggests TM did put in a bid, but was careful in not overpaying for the rights if doing so would make if very difficult to make its IPTV business profitable. We are positive that TM did not enter into a bidding war with Astro despite having the war chest to do so. Otherwise, TM would have likely paid a very high price for the rights but currently lacks the scale and subscriber base to recoup the bidding costs. Instead, we would prefer TM return excess cash to shareholders.
Whether TM will make a serious bid for the 2014-2017 will depend very much on its scale of IPTV ambitions. We think TM may make a serious bid for when the rights are up for grabs again in the future, if developments in Singapore is an accurate depiction of TM working to expand its service offerings from fixed line and broadband only, to triple-play services (fixed line, broadband, IPTV). Singapore Telecom recently won the EPL rights, outbidding rival incumbent StarHub.
Having not won the EPL, we believe TM will unlikely have another go at Astro by making a serious bid for the 2010 World Cup. Again, the lack of scale among the key reasons. Alternatively, TM may perhaps licence some 2010 World Cup football matches from Astro to provide an incentive for consumers to sign up for its retail high-speed broadband (HSBB) service due to be launched in 1Q10, but whether Astro is open to such arrangements and how the pricing will be worked out remains to be seen.
Red hot competition in India
EBITDA margins and earnings growth of telco stocks in India, including Axiata’s associate is expected to be under further pressure in the short to medium term as competition continues to escalate. Among the latest operator to cut tariffs is Axiata’s associate, Idea Cellular (IDEA IN, non-rated) in response to Reliance Communications’ (RCOM IN, non-rated) disruptive price plan early this month.
As mentioned in our note on Axiata dated Oct 7, we had expected Idea to respond quickly to Reliance’s disruptive price plan of INR0.50/min (US 1 cent/min) nationwide, believed to be among, if not the cheapest tariff in India then. Idea’s retaliatory action is imperative for it to minimise churn and maintain its growth trajectory, due to festivities during the next several weeks and protect market share in anticipation of new entrants. At least four new mobile operators are expected to enter in the crowded Indian market. Among the new entrants are Etisalat DB Telecom Pvt Ltd and Unitech Wireless Ltd.
On Oct 12, Idea raised competition by another notch with the announcement of a billing plan under which it will charge its subscribers in Mumbai INR0.40/min for local calls and INR0.50/min (US 1 cent/min) for national long distance calls and text messages. It is very likely that Idea will roll out its new billing plan to other circles in India to, as other mobile operators will likely respond soon with their own round of tariff cuts.
While overall mobile penetration is still fairly low at c.38% in India, the Department of Telecom predicted in a recent report that the high growth rate that mobile operators currently enjoy could taper off as early as end next year. Urban markets are largely saturated while rural and semi-urban areas do not offer the higher margins of urban markets. This may led to more pressure on average revenue per user (ARPU) as mobile operators expand their reach beyond the more wealthy urban dwellers.
With escalating competition, margins pressure and declining ARPU, mobile operators will find it increasingly difficult to maintain high earnings growth. During the month, Bharti Airtel reported disappointing 2QFY10 results as while net profit was up 13.4% y-o-y, it was lower 8% q-o-q. We will keep an eye on the intensifying competition in the Indian mobile landscape, given that Idea is the second largest component (after Celcom) to our fair value of Axiata.
DiGi’s 3QFY09 results review
DiGi’s 9MFY09 results were within house and consensus expectations. 9MFY09 revenue rose 2.2% y-o-y but net profit declined 12.2% y-o-y. The lower net profit was mainly due to EBITDA margin contraction, higher finance costs due to additional borrowings and higher operating expenditure from expanding its broadband services. EBITDA margins dropped 60 basis points q-o-q to 42.7% mainly due to A&P for its broadband expansion.
Subs growth rebounded in 3QFY09 as DiGi added 163k new subs (2QFY09: 75k) q-o-q to 7,393k subs. DiGi added 139k prepaid subs to 6,193k, while postpaid subs increased 24k to 1,200k. For the first time, DiGi disclosed its broadband subs base stood at 200k. There was a slight up-tick in ARPU as usage increased q-o-q. However, DiGi noted that usage still remained below pre-recession levels. Blended ARPU increased to RM55 (1QFY09: RM54) as blended AMPU increased to 228 minutes (2QFY09: 210 minutes).
DiGi declared a special net dividend of 75 sen/share, bringing total YTD net dividends to RM1.24/share (93% pay-out ratio). In addition, it has revised its dividend pay-out policy from 50% to a minimum 80% due to strong cash flow and a solid balance sheet. The move to raise its minimum pay-out may very well be in response to the impending listing of Maxis which is promising a minimum pay-out of 75%, and possibly 85% if market talk is true.
We reiterate our HOLD rating on DiGi while DCF-derived target price is trimmed from RM20.10 to RM20.00 (WACC: 6.9%, g: 2.0%) to reflect higher interest charges as a result of additional borrowings. No changes were made to our assumptions for subscriber growth and ARPU. Our FY09-11 EPS estimates are cut by c.1%. DiGi is accelerating is investment on 3G rollout, and is targeting to increase its broadband subs base from 26k to 30k by year end. Revenue from broadband is expected to be visible from 1QFY10 onwards.
• Upside to Maxis shares limited to RM6.35 Assuming investors are unsuccessful in subscribing for Maxis’ IPO shares, we believe the shares begin to look stretched above RM6.35 in the secondary equity market. Maxis IPO shares look relatively attractive at an IPO price of RM5.20 per share, implying a PE multiple of 15.5x (a marginal discount to DiGi’s 16.7x) based on FY10 EPS of 33.6 sen.
• Astro wins EPL rights; not clear if TM submitted bid Without too much of a surprise, Astro won the rights to broadcast the 2010-2013 English Premier League (EPL) football matches for a sum reported to be over US$250m (RM855m). It is unclear if Telekom Malaysia
ubmitted a bid for the rights, but we are positive that TM did not enter into a bidding war with Astro despite having the war chest to do so, preferring instead the company return excess cash to shareholders
• Red hot competition in India
EBITDA margins and earnings growth of telco stocks in India, including Axiata’s associate is expected to be under further pressure in the short to medium term as competition continues to escalate. Mobile operators will find it increasingly difficult to maintain high earnings growth, as Bharti Airtel showed with its disappointing 2QFY10 results.
• DiGi’s 3QFY09 results review
DiGi’s 9MFY09 results were within house and consensus expectations. Besides declaring a special net dividend of 75 sen/share, it revised its dividend pay-out policy from 50% to a minimum 80% due to strong cash flow and a solid balance sheet. The move to raise its minimum pay-out may be in response to the impending listing of Maxis which is promising a minimum pay-out of 75%, and possibly 85% if market talk is true • Global developments Notable global developments include the official arrival of the iPhone in China, handset subsidies hurting Sprint’s profitability and forecasts that the telecom equipment sector will return to low single-digit growth next year.
MALAYSIA CORPORATE NEWS
Upside to Maxis shares limited to RM6.35
Assuming some investors are unsuccessful in subscribing for Maxis’ IPO shares, we believe Maxis IPO shares begin to look stretched above RM6.35 in the secondary equity market. If a 15% premium is accorded to DiGi’s valuation, Maxis may trade up to RM6.35 post-IPO, but forward PE multiples look expensive at 19.0x based on FY10 EPS of 33.6 sen and dividend yields look rather modest at 4.0%.
Maxis will be listed at an IPO price of RM5.20 per share. This implies Maxis will command a PE multiple of 15.5x (a marginal discount to DiGi’s 16.7x) based on FY10 EPS of 33.6 sen. Quite likely Maxis may command a premium over DiGi given its market leadership and larger market capitalisation. Assuming a 15% premium is accorded to Maxis based on DiGi’s forward PE multiple of 16.7x, Maxis may trade up to RM6.35 based on a PE multiple of 19.0x. However, valuations look pricey at those levels
At an IPO price of RM5.20, Maxis’ dividend yields are decent at 4.8%, based on prospective FY10 DPS of 25.2 sen assuming a payout ratio of 75%. While such yields are still lower than DiGi’s (5.6%) and TM (6.4%), there is a possibility Maxis may increase its dividend payout ratio due to strong free cash flows.
There has been market talk that Maxis may increase the payout ratio to 85%. If this materialises, this will increase our FY10 DPS estimates by 3.4 sen to 28.6 sen, whereby dividend yields will increase to 5.5% - very similar to DiGi’s.
Our back of the envelope estimates forecast Maxis FY10 EPS of 33.6 sen. Our forecast assumes EBIT growth of 5.4% in 2010 from annualised 2009 figures. Maxis needs to achieve such EBIT growth to offset new finance charges amounting to about RM185m from next year onwards. Consequently, on a net income basis, Maxis’ growth will be flat from FY09 to FY10. The new finance charges are a result of borrowing RM5bn next year to repay the holding company, Maxis Communications Bhd under the pre-listing exercise.
Astro wins EPL rights; not clear if TM submitted bid
Without too much of a surprise, Astro won the rights to broadcast the 2010-2013 English Premier League (EPL) football matches for a sum reported to be over US$250m (RM855m), according to The Edge Financial Daily on Oct 8. It is not clear if Telekom Malaysia (TM) had submitted a bid for the rights, but one can surmise that TM did make a bid, but not a very serious one.
The Edge Financial Daily did not mention that TM made a bid, but an Astro statement that the rights cost the company a “higher price than anticipated” as “competitive environment drove the rights up” suggests TM did put in a bid, but was careful in not overpaying for the rights if doing so would make if very difficult to make its IPTV business profitable. We are positive that TM did not enter into a bidding war with Astro despite having the war chest to do so. Otherwise, TM would have likely paid a very high price for the rights but currently lacks the scale and subscriber base to recoup the bidding costs. Instead, we would prefer TM return excess cash to shareholders.
Whether TM will make a serious bid for the 2014-2017 will depend very much on its scale of IPTV ambitions. We think TM may make a serious bid for when the rights are up for grabs again in the future, if developments in Singapore is an accurate depiction of TM working to expand its service offerings from fixed line and broadband only, to triple-play services (fixed line, broadband, IPTV). Singapore Telecom recently won the EPL rights, outbidding rival incumbent StarHub.
Having not won the EPL, we believe TM will unlikely have another go at Astro by making a serious bid for the 2010 World Cup. Again, the lack of scale among the key reasons. Alternatively, TM may perhaps licence some 2010 World Cup football matches from Astro to provide an incentive for consumers to sign up for its retail high-speed broadband (HSBB) service due to be launched in 1Q10, but whether Astro is open to such arrangements and how the pricing will be worked out remains to be seen.
Red hot competition in India
EBITDA margins and earnings growth of telco stocks in India, including Axiata’s associate is expected to be under further pressure in the short to medium term as competition continues to escalate. Among the latest operator to cut tariffs is Axiata’s associate, Idea Cellular (IDEA IN, non-rated) in response to Reliance Communications’ (RCOM IN, non-rated) disruptive price plan early this month.
As mentioned in our note on Axiata dated Oct 7, we had expected Idea to respond quickly to Reliance’s disruptive price plan of INR0.50/min (US 1 cent/min) nationwide, believed to be among, if not the cheapest tariff in India then. Idea’s retaliatory action is imperative for it to minimise churn and maintain its growth trajectory, due to festivities during the next several weeks and protect market share in anticipation of new entrants. At least four new mobile operators are expected to enter in the crowded Indian market. Among the new entrants are Etisalat DB Telecom Pvt Ltd and Unitech Wireless Ltd.
On Oct 12, Idea raised competition by another notch with the announcement of a billing plan under which it will charge its subscribers in Mumbai INR0.40/min for local calls and INR0.50/min (US 1 cent/min) for national long distance calls and text messages. It is very likely that Idea will roll out its new billing plan to other circles in India to, as other mobile operators will likely respond soon with their own round of tariff cuts.
While overall mobile penetration is still fairly low at c.38% in India, the Department of Telecom predicted in a recent report that the high growth rate that mobile operators currently enjoy could taper off as early as end next year. Urban markets are largely saturated while rural and semi-urban areas do not offer the higher margins of urban markets. This may led to more pressure on average revenue per user (ARPU) as mobile operators expand their reach beyond the more wealthy urban dwellers.
With escalating competition, margins pressure and declining ARPU, mobile operators will find it increasingly difficult to maintain high earnings growth. During the month, Bharti Airtel reported disappointing 2QFY10 results as while net profit was up 13.4% y-o-y, it was lower 8% q-o-q. We will keep an eye on the intensifying competition in the Indian mobile landscape, given that Idea is the second largest component (after Celcom) to our fair value of Axiata.
DiGi’s 3QFY09 results review
DiGi’s 9MFY09 results were within house and consensus expectations. 9MFY09 revenue rose 2.2% y-o-y but net profit declined 12.2% y-o-y. The lower net profit was mainly due to EBITDA margin contraction, higher finance costs due to additional borrowings and higher operating expenditure from expanding its broadband services. EBITDA margins dropped 60 basis points q-o-q to 42.7% mainly due to A&P for its broadband expansion.
Subs growth rebounded in 3QFY09 as DiGi added 163k new subs (2QFY09: 75k) q-o-q to 7,393k subs. DiGi added 139k prepaid subs to 6,193k, while postpaid subs increased 24k to 1,200k. For the first time, DiGi disclosed its broadband subs base stood at 200k. There was a slight up-tick in ARPU as usage increased q-o-q. However, DiGi noted that usage still remained below pre-recession levels. Blended ARPU increased to RM55 (1QFY09: RM54) as blended AMPU increased to 228 minutes (2QFY09: 210 minutes).
DiGi declared a special net dividend of 75 sen/share, bringing total YTD net dividends to RM1.24/share (93% pay-out ratio). In addition, it has revised its dividend pay-out policy from 50% to a minimum 80% due to strong cash flow and a solid balance sheet. The move to raise its minimum pay-out may very well be in response to the impending listing of Maxis which is promising a minimum pay-out of 75%, and possibly 85% if market talk is true.
We reiterate our HOLD rating on DiGi while DCF-derived target price is trimmed from RM20.10 to RM20.00 (WACC: 6.9%, g: 2.0%) to reflect higher interest charges as a result of additional borrowings. No changes were made to our assumptions for subscriber growth and ARPU. Our FY09-11 EPS estimates are cut by c.1%. DiGi is accelerating is investment on 3G rollout, and is targeting to increase its broadband subs base from 26k to 30k by year end. Revenue from broadband is expected to be visible from 1QFY10 onwards.
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