TM International | Higher risks and debt weigh on valuations

November 25, 2008 at 7:44 am Leave a comment

TM International | Higher risks and debt weigh on valuations

• Celcom to face near term margin pressure
The implementation of Mobile Number Portability in Oct is likely to put pressure on Celcom’s EBITDA margins, just as it had done for DiGi’s. Thus far, it appears that DiGi has chosen to compete via aggressive
handset subsidies. Celcom though has yet to respond to DiGi’s manoeuvring, and appeared to take a wait-and-see approach to evaluate DiGi’s strategy. We note that continuous cost-cutting measures taken by
Celcom may reduce the impact of MNP on its EBITDA margins.
• Outlook on XL still positive
Excelcomindo’s (XL) recent 3QFY08 good set of results showed 9M08 gross revenue growing 60% y-o-y to IDR9,178bn (RM2.77bn), while net profit spiked 328% y-o-y to IDR891bn (RM268.9m) due to higher usage.
EBITDA margin improved to 45% in 9M08 from 42% in 9M07. Postpaid ARPU as of 9M08 remained constant from 9M07, but blended ARPU and prepaid ARPU decreased 13% and 10% y-o-y respectively. Subscriber
base growth was strong at 96% y-o-y, with the bulk of the increase coming from the postpaid market.
We estimate XL earnings to grow at 10.8% CAGR for FY08-12 mainly driven by a growing subscriber base despite a weaker economic outlook.
Inflation, which had been a major concern after peaking at c.12% in Sept, has eased in Indonesia due to the broad fall in commodity prices. Lower inflation should increase consumer spending power, but this is tempered by the government’s lower economic growth forecast for 2009 at 5.5%-6.1% from 6.0%-6.4% in 2008.
• Dialog’s growth somewhat intact
Dialog’s 3QFY08 results were less than encouraging despite top-line growth. For 9M08, revenue increased 9% y-o-y to Rs27.39bn (RM897.0m) on the back of growth in mobile subscriber base, but net profit fell 86% yo-y to Rs1.03bn (RM33.7m) due to negative contributions from Broadband and TV segments.
EBITDA margins should improve going forward from 27.0% in 3QFY08, as inflation continues to decelerate from the peak of 28.2% in June to 20.2% in Oct. Dialog should benefit from lower network costs as inflation eases. We believe prospects for Dialog remain intact due to strong subscriber growth in its Broadband and TV segments. As at 3QFY08, Broadband subscribers have risen to 125k (3QFY07: 7k) while TV subscribers
increased to 117k (3QFY07: 39k). Rising revenue from these two segments should result in positive contributions in FY10.
• Huge debt and risks weigh down valuations
Valuations have taken a tumble which we believe is due to the massive RM6.5bn debt taken on as part of TMI’s strategy to expand its presence in India. While growth prospects in India are positive due to low penetration rate of less than 20%, the high capex required to establish a pan-India presence and intense competition are some of the key risks facing the merged entity of Idea-Spice. Idea recently reported EBITDA margin compression to 28% (2QFY08: 33%) due to network expansion costs and higher A&P expenses on brand building.
• Maintain BUY, TP reduced to RM5.95
We maintain our BUY call on TMI, but reduce our target price from RM7.80 to RM5.95 to take into account higher risks facing its subsidiaries and TMI’s high gearing. Key risks to our recommendation include: (1)
lower than expected subscriber growth, (2) higher than expected capex and (3) EBITDA margin contraction due to competitive and inflationary risks.

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Affin Holdings | 3QFY08: Weak capital markets take a toll November 19, 2008 Daily Highlights

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