KUCHING: The telecommunications (telco) sector as a whole is said to be on track to achieving mid-single digit revenue growth this year although earnings growth for the sector is expected to be challenging moving forward.
In making the call, RHB Research Institute Sdn Bhd (RHB Research) analyst Lim Tee Yang said the revenue and bottom line growth estimates were based on sector results for the first quarter of financial year 2013 (1QCY13) which he described as ‘satisfactory’ with Telekom Malaysia Bhd (TM) surprising on the upside.
He noted that TM had “outperformed primarily due to tax incentives related to its high-speed broadband investments.”
“We believe consensus’s FY13 EPS (earnings per share) estimates for TM will likely be revised upwards following management guidance that TM’s effective tax rate will only be around 10 per cent due to high-speed broadband related investments.
“This, we believe, was largely unanticipated as management’s prior guidance was for its effective tax rate to normalise towards the statutory level in FY13,” Lim noted.
Performance of the other four telco stocks under RHB Research’s coverage – Axiata Group Bhd (Axiata), Maxis Bhd (Maxis), DiGi.com Bhd (Digi) and Time dotCom Bhd (TdC) – were within expectations, the analyst added.
Sequential revenue growth for the sector moderated as expected, and was supported mainly by very strong handset sales. Service revenue growth was flattish due to seasonality following the festivities in 4Q12 and the shorter working period in 1Q13.
Following the seasonally soft 1Q, Lim believed the sector’s sequential revenue growth will pick up going forward with emphasis returning to the large screen segment on the back of wider fourth generation (4G) Long Term Evolution (LTE) network coverage rollout.
Costs were quite well managed in 1Q and all the telcos saw better earnings before interest, tax, depreciation and amortisation (EBITDA) margins, with the exception of DiGi which foresees a recovery upon selling less handset bundles going forward.
“We note that voice revenue may struggle to remain stable in 2013 due to low-to-mid single digit y-o-y declines in 1Q13, but it is still early days.
“Growth in the fibre market remains quite strong as (TM’s) UniFi’s subscriber growth momentum remains largely intact. We estimate TM is still grabbing the lion’s share (90 per cent) of industry fibre net adds.
“Any impact to TM from the end-April launch of Maxis’ fibre service in partnership with Astro’s B.yond IPTV (Internet Protocol Television) service will likely be visible only in 2Q13.
“Earnings growth for the sector will be challenging as we expect flattish growth, primarily dragged down by Axiata.
“We now understand that TM’s effective tax rate will only normalise in FY14, upon the expiry of the HSBB (high speed broadband) tax incentives in September 2013.
“We do not anticipate significant changes to FY13 earnings for the other stocks, as results were generally within our and consensus expectations,” the analyst concluded as he revealed TdC as the sector pick with an unchanged target price of RM5.55 per share.