HLIB: Telecom sector’s dividend yield a plus point

The telecommunications (telecom) sector remains stable, supported by resilient domestic demand, and the dependable dividend yields will be a plus point in a volatile market going forward, says Hong Leong Investment Bank (HLIB).

In an industry insight report, the research house said the telco sector’s performance in 2017 was satisfactory, with an average return of 9% as compared to the FBM KLCI’s 9.5% supported by healthy competition.

It said that the 700MHz tender is pro-business and would enhance operational efficiency, thanks to a superior propagation feature.

The terms and pricing structure of only 1.3% lower matched HLIB’s industry-wide contrarian expectations.

“We view this positively and as pro-business, as it paves a roadmap to meet insatiable mobile broadband demand.

“We expect the big three to obtain two blocks each, while Telekom Malaysia Bhd (TM) and U Mobile will have one each.

“Post-simulation, gearing levels remain comfortable while financial year 2019 profit after tax impacts are projected to range 3% to 4.1%.

“Mixed updates on above-2GHz spectra, but do not expect exorbitant fees if an auction is called,” said HLIB.

The research house added that according to Boston Consulting Group, Malaysia would benefit from an estimated US$17.5bil (RM70.04bil) addition to gross domestic product along with 23,000 new business activities by 2020, through allotting the 700MHz band to mobile broadband.

For voice-related services, the mobile termination rate (MTR) and fixed termination rate (FTR) have been drastically cut from 2018 to 2020, which may lead to a 1% to 5% earnings impact, but cushioned by voice to data substitution.

Given that the reduction in the MTR is higher compared to the FTR, HLIB believes that TM will enjoy net cost savings in this fixed to mobile substitution environment.

However, this will lift tier-two cellular companies’ (celcos) competitiveness.

In addition, high-speed broadband finally got regulated with substantial discounts in 2019 to 2020.

The access pricing for high-speed broadband may benefit celcos in terms of savings in wholesale transmission backhaul charges at the expense of TM.

Several measures unveiled in Budget 2018 to raise disposable income and spur private consumption are not expected to benefit telcos due to data-monetisation challenges.

In 2018, economic growth is expected to continue its sustainability, allowing Bank Negara to reconsider the level of accommodativeness in monetary policy.

“As such, we anticipate Bank Negara to normalise the overnight policy rate (OPR) by raising one-off 25 basis points in 2018, as early as January 2018.

“Expect the one-off normalisation to narrow the gap between the OPR and dividend yields.

“In general, telco share price movements are partly associated with dividend yields, hence they are susceptible to changes in bond yields through an inverse relationship.

“If the market’s yield expectation continues to rise, telcos’ dividend yields will eventually be perceived to be less attractive, and subsequently, this will exert pressure on share prices,” said HLIB.

Instead of price, telcos will differentiate via product features such as the quality of service, more data value, customer service and introduction of new services to increase data adoption and usage.

The research house does not perceive celco data quota generosity as a price war, since price levels for these stepped-up packages were firmly unchanged, thus protecting any average revenue per user downside.

Gradually, wireless technology is expected to erode the wired sector’s market share, with the WTTx broadband solution leveraging on matured 4G and 5G in the future.

A new breed, Broadnet may spell bad news to TM’s monopoly.

Satellite player CONNECTme, which is rumoured to be part of Measat and scheduled for launch on March 8, will also be offering broadband services.

While this satellite broadband may not threaten fixed players immediately due to high pricing and inferior quality (rain fade), the upcoming high-throughput satellite technology is expected to be cost-effective, high capacity and high quality.