How telco stocks will perform this year: JP Morgan
In the past few years, telcos in the region have faced revenue pressures. With competitive, regulatory, technological and disruptive forces entering the market, revenues for many telcos fell, leading to losses for some. Then the Covid-19 pandemic struck and the once “safe haven” for investors was in deep trouble.
Ranjan Sharma, Asean TMT analyst for JP Morgan Securities Singapore, tells The Edge
Singapore, “If you look across the Asean telco industry revenues, they peaked some time in 2015 and 2016, but then dipped after a number of years. Then, Covid-19 made it worse in certain countries, especially those that are more dependent on the travel industry.”
The combined factors driving revenue pressures, according to Sharma, are regulation for cheaper prices and affordability of service and competition as telcos fight for market share as the dynamics of the business change.
However, while 2020 was not a defensive year for telcos, Sharma says 2021 could be a year of recovery for telcos. For one, regulators now have to take into account three mandates: Affordability of service, availability of service and quality of service.
“But these three mandates often do not go together, especially in emerging markets. You usually can’t have a good network at cheap prices. Since 2019, regulators have been supporting the change in the industry structure though. They are now more open to industry consolidations or for operators to have more network partnerships and JVs. That way, the telcos can keep a low capex, low-cost base and industry economics can improve,” says Sharma.
This was seen in Singapore at the recent 5G launch that saw StarHub and M1 enter into a JV to bid for the rights to operate 5G networks across Singapore which the duo eventually won.
“The telcos’ revenue potential remains the same [even after a JV]. But with this, they have managed to cut industry capex by half for 5G. So, the regulators are becoming more understanding and cognisant of the fact that the way that they have operated in the past and the regulations created are not conducive investments in the industry,” says Sharma, although this sort of collaboration and consolidation is likely to vary from country to country.
Share price drivers
Given the industry is expected to recover this year, Sharma sees three drivers that will help boost the share prices of telcos.
On the back of higher industry competition and better regulatory support, telcos can better monetise data, especially for those in Emerging Markets. For example, Thailand’s Advanced Info Services (AIS), an associate company of Singapore Telecommunications (Singtel), was hit by the lack of travellers. But AIS is now trying to reflate average revenue per user (ARPU) by expanding its 5G networks and offerings at a premium while gaining market share. Similarly,
Singapore telcos could also leverage the launch of 5G to reflate ARPUs by offering access to 5G at a premium, along with new content and offerings that would require 5G to run optimally, such as cloud gaming and VR.
Earnings recovery could also be the catalyst to drive the share prices of AIS, Axiata and PT Telekomunikasi Indonesia, says Sharma.
However, JP Morgan is cautious on the earnings outlook for Maxis and Telekom Malaysia due to the competitive environment. There is also scepticism over how much more costs can be contained.
Further restructuring and potential M&As could be a recurring theme across the industry too. On April 8, Celcom Axiata, a unit of Axiata, is reportedly merging with Digi.Com to create the biggest mobile service provider in Malaysia, according to The Edge Malaysia. In Indonesia, potential wireless consolidation should benefit players like Telekomunikasi Indonesia and Axiata but this could be a negative for telecom tower companies. However, there are separate expectations for M&A within the tower industry that could be a catalyst for the tower companies. For instance, Axiata’s edotco Axiata has already expressed interest in Indonesian tower companies.
The third factor that could drive share prices is asset monetisation through IPOs and external investments.
In Indonesia, tower leasing provider Dayamitra Telekomunikasi (Mitratel) is considering listing its shares on the Indonesia Stock Exchange. Mitratel, a subsidiary of Telkom, has shown interest in listing since 2011 but collided with various rules.
According to media reports, Mitratel’s IPO could happen sometime between 4Q2021 and 1H2022. To prepare for the IPO, Mitratel was pursuing organic and inorganic growth to become the largest telco tower company in Indonesia. Mitratel plans to release about 20% of new shares to the capital market in its IPO. The funds raised from the IPO will be used for the development and optimisation of its tower and digital business.
In Sharma’s view, Mitratel’s IPO could benefit Telkom through the crystallisation of the value of Telkom’s tower portfolio; IPO proceeds supporting dividend; and relative value arbitrage, as Indonesian tower companies are trading at a one year forward EV/ebitda of 10–13 times compared to Telkom at about 5 times.
On the other hand, Axiata is looking to fund new growth through external investments. It aims to grow edotco’s towers from about 20,000 currently to over 70,000 by FY2024 through organic and inorganic means; edotco could also grow in neighbouring countries like Indonesia and Vietnam.
On the whole, the market seems to not assign much value to Asean telcos’ digital businesses, while earnings drag from the digital business tends to weigh on the valuation of the core telco franchise. Hence, some investments into the FinTech or digital business could help support growth, crystalising value and reducing earnings drag for telcos.
Growth in enterprise
“We are seeing telcos pricing 5G at a premium to reflate consumer ARPUs and get some industry revenue growth back. But what happens in emerging markets, especially with the macro stress around the pandemic, is that the spending power of consumers has been impacted,” notes Sharma, who adds that if consumers are not willing to pay more to the telcos for services, then telcos can pursue growth in the fixed broadband space or enterprise.
He believes that is why many telcos have taken the step towards enterprise to search for revenue growth and new business opportunities, which they have not previously focused on.
However, the enterprise business in Singapore seems to have a lower profit margin compared to the consumer business. For now, the proportion of consumer revenue still dominates overall revenue.
“For most telcos, the consumer revenues are far higher than enterprise revenue. So, until they have more stability of growth in the consumer space, enterprise growth may not be able to offset the decline,” says Sharma.
As a result, telcos need to improve the economics of the wireless or consumer business but still give some focus to the enterprise segment at the same time, as it is still important.
In 1HFY2020 ended September 2020, 53% of Singtel’s overall revenue came from its enterprise segment, boosted by strong growth in its ICT services. However, this is not easy to achieve, especially for emerging markets that lack the proper or more advanced infrastructure to support enterprise offerings.
Nevertheless, Singapore’s two listed telcos — Singtel and StarHub — are still on Sharma’s radar as he believes that these two stocks may surprise positively because of ARPU reflation. “We have highlighted that they might have the scope for the most upside and most positive surprise,” says Sharma.
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