Telecommunications Weekly Review: 15th – 21st December 2008

December 23, 2008 at 2:50 am Leave a comment

· Dividend stocks the way to go?
With the US economy cautiously forecasted to only recover in early 2010 by the International Monetary Fund (IMF), investors would be better off looking at domestic-oriented, non-export based companies such as DiGi and TM. Both companies have demonstrated largely resilient earnings so far (after stripping out exceptionals in the case of TM), but DiGi appears to be superior despite the marginal q-o-q drop in earnings due to higher A&P expenditure for Mobile Number Portability (MNP). DiGi has better free cash flow than TM, considering that DiGi has steadily growing operating cash flows with only incremental increase in capex requirements. TM however faces a shrinking fixed-line voice revenue market which has yet to be fully offset by growth in the broadband market. In addition, TM is committed to spending almost 50% more annually for the next 3 years on capex to roll-out its RM11.3bn HSBB project. Hence, DiGi gets our pick over TM for dividends.
· TMI better off privatised?
TMI’s share price has certainly seen better days, as it is only worth barely almost half of its reference price of RM7.85 since the demerger in April. Since the demerger, TMI has not really made all the right moves. First, it made a very expensive acquisition in Idea Cellular of India as part of a merger with Spice. TMI then had to gear up substantially to finance the aforesaid acquisition. Now it is even looking into expanding in Iran despite its other operations in Sri Lanka and Bangladesh bleeding red ink, and its balance sheet already geared at 1.5x. This begs the question of whether is TMI better off privatised?
This is not a far fetched scenario, if we look at the reasons given by Binariang in taking Maxis private back in May 2007. Back then, Maxis was undergoing a rapid expansion in India and Indonesia, which required substantial capex resulting in increased gearing. Had Maxis not been
taken private, not only would have shareholders faced increased earnings volatility, they might have to shallow lower dividend payouts due to higher borrowing costs. Taking Maxis private accorded Binariang greater flexibility to manage Maxis and re-list when earnings are “stable” again. Pricing would be important if any privatisation exercise intends to be successful. Based on Monday’s price when we published the note, we believe a 20% premium (similar to Maxis) or RM4.18 would be insufficient, as many shareholders would still be facing capital losses considering the YTD VWAP since TMI began trading is RM5.90. However, if the offer price were RM5.90, that would be more than fair as it would be priced at EV/EBITDA ratio of 9.0x, similar to 9.8x in Maxis’ privatisation exercise when the stock market was more buoyant. At RM5.90, Khazanah would need RM12.3bn (instead of RM7.2bn at RM4.18) to buy out the remaining
44.5% equity stake.
· MAINTAIN NEUTRAL on the sector

Share price performance

Quiet week. Share prices of telecom stocks moved sideways due to the lack of major news flow. Apart from that, EPF was seen loading up on high dividend paying stocks as it accumulated more shares in TM and DiGi. In a filing on December 12, EPF bought an additional 805,400 shares in TM, bringing its equity stake to 15.5%. On December 16, EPF added 137,700 DiGi shares to its portfolio and now owns 9.8% in DiGi.

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