DIGI (6947) - Are telco stocks now a good buy?
April 6, 2015 : 9:54 AM MYT
KUALA LUMPUR: Investors may be wondering if the stocks of telecommunication firms (telcos) are now a good buy, after initial estimates that they stand to get at least an extra 3% in prepaid revenue after the 6% goods and services tax (GST) kicked in last Wednesday, which saw them upping the price of prepaid coupons.
However, analysts say it is too late now to jump into telco stocks just because of that.
“If investors were to jump into buying telco stocks purely from anticipation of higher earnings due to GST implementation, then it is already too late do so now. The GST talk has been around for a long time and any benefit would have been priced in,” a research analyst with a local investment bank here told The Edge Financial Daily.
“There is no doubt that telcos are generally defensive stocks with steady dividend yields. [But] at 3% to 4% yield, they are steady but not excellent. Investors can get that with many other sectors,” he added.
In an April 2 note, AllianceDBS Research had “conservatively assumed a 3% effective increase in prepaid revenue for the mobile players” as it thinks that usage might be slightly impacted due to price inflation in the economy.
“This had previously led to an earnings upgrade of about 2% to 5% for the mobile players in financial year 2015 (FY15) and FY16,” said AllianceDBS Research.
Maybank IB Research’s analyst Tan Chi Wei, who has an “overweight” call on Malaysian telcos, in a note on the same day also assumed that operators would enjoy the equivalent of a 3% pass-through in service taxes in its earnings forecast.
Both research houses noted that DiGi.Com Bhd (DiGi) (fundamental: 1.55; valuation: 2.10), which has the highest percentage of revenue generated from prepaid subscribers compared to its peers, will benefit the most out of the price increase.
However, more importantly, they both noted that the benefit had already been priced in or reflected in DiGi’s share price.
DiGi has a rolling 12-month dividend yield of 4.1%, according to theedgemarkets.com. In contrast, Maxis Bhd ’s 12-month rolling is at 5.57%. Meanwhile, CIMB Research’s analyst, Foong Choong Chen, who has an “underweight” call on the sector, said in a note, also on April 2, that the risk-reward of telcos is unfavourable due to their current rich valuations and a potentially more intense competition this year.
To recap, telcos increased their top-up voucher or reload coupon price by 6% after the GST kicked in on April 1, which caused quite an uproar among consumers, prompting theCustoms Department to announce that it was investigating the telcos for the price increase, saying that prices should have been maintained.
To add to the confusion, Deputy Finance Minister Datuk Ahmad also weighed in on the issue the following day and said there should be no change to the prices of the reload coupons as the 6% GST would merely replace the sales and service tax (SST), which is also at 6%.
But the Communications and Multimedia Consumer Forum later affirmed that top-ups for prepaid mobile services are subject to GST.
Telcos also clarified that they had previously absorbed the SST on prepaid mobile users.
On Friday, the Malaysian Communications and Multimedia Commission issued a press statement confirming that GST will be imposed on prepaid reloads.
However, to ease the burden on consumers and as a transitional measure, it said four major telcos, namely Celcom Axiata Bhd, DiGi, Maxis (fundamental: 1.15; valuation: 0.9) and UMobile Sdn Bhd customers who reload RM5 and above will be given an additional value which is higher than the 6% GST in the form of free minutes and text messages for three months from April 3.
A research analyst with a local bank said that the compromise is “good news” to telcos as the status quo of higher prices would likely stay at the end of three months.
“The solution is temporary and helps customers with the transition to higher costs. At the same time, mobile operators will still have the opportunity to pass on the cost of taxes to end users.
“Plus, the additional 6% air time that they give to users may not may not be used by the customers. I think consumption patterns would be largely the same,” he said.
DiGi closed unchanged at RM6.33 last Friday, with a market capitalisation of RM49.22 billion.
Maxis was up 1 sen at RM7.18, giving it a market capitalisation of RM53.9 billion.
http://www.theedgemarkets.com/
April 6, 2015 : 9:54 AM MYT
KUALA LUMPUR: Investors may be wondering if the stocks of telecommunication firms (telcos) are now a good buy, after initial estimates that they stand to get at least an extra 3% in prepaid revenue after the 6% goods and services tax (GST) kicked in last Wednesday, which saw them upping the price of prepaid coupons.
However, analysts say it is too late now to jump into telco stocks just because of that.
“If investors were to jump into buying telco stocks purely from anticipation of higher earnings due to GST implementation, then it is already too late do so now. The GST talk has been around for a long time and any benefit would have been priced in,” a research analyst with a local investment bank here told The Edge Financial Daily.
“There is no doubt that telcos are generally defensive stocks with steady dividend yields. [But] at 3% to 4% yield, they are steady but not excellent. Investors can get that with many other sectors,” he added.
In an April 2 note, AllianceDBS Research had “conservatively assumed a 3% effective increase in prepaid revenue for the mobile players” as it thinks that usage might be slightly impacted due to price inflation in the economy.
“This had previously led to an earnings upgrade of about 2% to 5% for the mobile players in financial year 2015 (FY15) and FY16,” said AllianceDBS Research.
Maybank IB Research’s analyst Tan Chi Wei, who has an “overweight” call on Malaysian telcos, in a note on the same day also assumed that operators would enjoy the equivalent of a 3% pass-through in service taxes in its earnings forecast.
Both research houses noted that DiGi.Com Bhd (DiGi) (fundamental: 1.55; valuation: 2.10), which has the highest percentage of revenue generated from prepaid subscribers compared to its peers, will benefit the most out of the price increase.
However, more importantly, they both noted that the benefit had already been priced in or reflected in DiGi’s share price.
DiGi has a rolling 12-month dividend yield of 4.1%, according to theedgemarkets.com. In contrast, Maxis Bhd ’s 12-month rolling is at 5.57%. Meanwhile, CIMB Research’s analyst, Foong Choong Chen, who has an “underweight” call on the sector, said in a note, also on April 2, that the risk-reward of telcos is unfavourable due to their current rich valuations and a potentially more intense competition this year.
To recap, telcos increased their top-up voucher or reload coupon price by 6% after the GST kicked in on April 1, which caused quite an uproar among consumers, prompting theCustoms Department to announce that it was investigating the telcos for the price increase, saying that prices should have been maintained.
To add to the confusion, Deputy Finance Minister Datuk Ahmad also weighed in on the issue the following day and said there should be no change to the prices of the reload coupons as the 6% GST would merely replace the sales and service tax (SST), which is also at 6%.
But the Communications and Multimedia Consumer Forum later affirmed that top-ups for prepaid mobile services are subject to GST.
Telcos also clarified that they had previously absorbed the SST on prepaid mobile users.
On Friday, the Malaysian Communications and Multimedia Commission issued a press statement confirming that GST will be imposed on prepaid reloads.
However, to ease the burden on consumers and as a transitional measure, it said four major telcos, namely Celcom Axiata Bhd, DiGi, Maxis (fundamental: 1.15; valuation: 0.9) and UMobile Sdn Bhd customers who reload RM5 and above will be given an additional value which is higher than the 6% GST in the form of free minutes and text messages for three months from April 3.
A research analyst with a local bank said that the compromise is “good news” to telcos as the status quo of higher prices would likely stay at the end of three months.
“The solution is temporary and helps customers with the transition to higher costs. At the same time, mobile operators will still have the opportunity to pass on the cost of taxes to end users.
“Plus, the additional 6% air time that they give to users may not may not be used by the customers. I think consumption patterns would be largely the same,” he said.
DiGi closed unchanged at RM6.33 last Friday, with a market capitalisation of RM49.22 billion.
Maxis was up 1 sen at RM7.18, giving it a market capitalisation of RM53.9 billion.
http://www.theedgemarkets.com/
