Written by Insider Asia
Friday, 30 March 2012 14:49
In previous articles we have highlighted telecommunications companies as the new generation of high-yielding stocks amid expectations of slower industry growth. In addition to upping the annual dividend payout ratio, some are boosting shareholder returns through capital repayment exercises.
Following DiGi.Com Bhd’s proposed capital repayment exercise last year, Telekom Malaysia Bhd (TM) is the latest to announce a similar move. This would be in keeping with investor perception of the stock as a relatively less risky, high-yielding investment.
The company’s growth prospects were weak following the de-merger in 2008. Its bread-and-butter fixed line telephony business remains in a gradual decline as consumers switch to mobile lines. The fixed line broadband business, Streamyx, also came under pressure in an increasingly crowded market, with the emergence of WiMAX and 3G wireless broadband operators.
In short, its generous dividend policy — minimum payout totalling RM700 million or 90% of net profit, whichever is higher — has been the biggest attraction for investors, until recently.
Strong take-up for UniFi rejuvenates outlook
The surprisingly strong take-up for its high-speed broadband service, UniFi, appears to have rejuvenated the company’s growth prospects and investor interest in the stock.
From less than 33,000 subscribers in its first year of launch in 2010, total subscribers surged to 236,501 by the end of last year while the average revenue per user (ARPU) stood at about RM184 per month.
The strong momentum continued into the first few months of the current year. Total subscribers have now exceeded 300,000, translating into a take-up rate of roughly 25% of the total premises passed.
Strength in the broadband business — where turnover grew 21% y-o-y underpinned TM’s 4.1% revenue increase in 2011, up from 2.1% growth in 2010 — is expected to remain the key growth driver for the foreseeable future.
Margins improved on the back of the higher turnover last year. Net profit totalled RM1.19 billion. Even after adjusting for one-off gains/losses, including tax incentives from last-mile broadband investments, normalised profits were up sharply on the year at roughly RM635 million, from a comparable RM422 million in 2010.
Riding on the positive momentum, TM has upped its turnover growth target to 5% for 2012. Total UniFi subscribers is expected to reach 400,000 by year-end, which appears to be fairly conservative if the pace recorded in the first few months of the year is sustained.
More competition for UniFi
UniFi will start to see competition from Maxis Bhd and Packet One Sdn Bhd (P1) in the coming months. Both companies have signed wholesale agreements giving them access to the estimated 1.3 million households by end-2012.
Maxis in particular could be a formidable competitor with the experience of its sister company, Astro All Asia Networks plc, in terms of Internet protocol TV (IPTV) content and video on demand offerings. P1 aims to attract higher-end business customers with its bundling of fixed and nomadic broadband services. The company targets to launch its high-speed broadband (HSBB) package by end-1Q12.
Celcom Axiata Bhd and REDtone International Bhd have recently signed similar wholesale agreements with TM.
Lower margins despite top line growth
Despite expectations of stronger turnover, however, TM expects margins to compress this year on the back of higher content cost for HyppTV, rising advertising and promotion expenses with increasing competition as well as higher maintenance costs.
On balance, we forecast net profit totalling some RM663 million this year, which implies its shares are trading at a fairly pricey 28.4 times our estimated earnings. The high valuations are being supported by TM’s expected yields this year.
The company has proposed a 30 sen per share capital repayment, on top of the minimum 19.6 sen per share dividends. That translates into a net yield of 9.4% at the current price of RM5.26. The exercise is slated for completion by 3Q12.
Yields likely to fall in 2013
Looking further ahead, yields are expected to normalise in 2013.
The proposed capital repayment and annual dividend will cost the company some RM1.77 billion and push gearing higher. Net gearing stood at 31.5% at end-2011, up from 15.4% at end-2010, and is expected to rise to roughly 63% by end-2012 after the capital repayment and dividend payments and estimated capital expenditure of about RM2.6 billion.
This may cap the prospect for future special dividends, at least in the medium term. TM’s regular annual dividends of 19.6 sen per share would translate into a net yield of roughly 4% for shareholders at the prevailing price, adjusted for the 30 sen per share capital repayment.
DiGi’s strong balance sheet bodes well for sustainable dividends
DiGi is expected to complete its RM509 million capital repayment exercise this year. Excluding the small portion that was disbursed last year, total payment (including dividends) this year is estimated at about 22.4 sen per share. That translates into a net yield of 5.7% at the current share price of RM3.93.
We expect DiGi to pay at least 100% of its annual profit as dividends. Thanks to strong cash flow from operations, the company is flush with cash — net cash totalled over RM1 billion at end-2011. Its balance sheet is well off the optimal capital structure of 35% to 45% debt-to-equity ratio.
Dividends to shareholders are limited by distributable reserves but the company has hinted at further capital management measures to raise the amount payable and move closer to its target debt-to-equity ratio.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily theedgemalaysia.com, March 30, 2012.
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