Regional Telecommunications: Re-Winding The Yield Compression Theme
The continuing risk-off sentiment post Brexit is generally supportive of yield-oriented telco markets. Since the 24 Jun referendum, SG Telcos – which are the most predisposed to the dividend theme – have re-rated by 11-13% (MY Telcos: +2-3%, TH Telcos: +2-6%). Assuming a further 50bps compression in yields, we estimate an added 10-13% upside for SG Telcos (MY/TH Telcos: +9-16%). Telcos with the greatest upside across the ASEAN-4 are M1, AIS and Singtel on a renewed yield compression theme. Our regional telco Top Picks: Telkom Indonesia, M1, AIS and Time dotCom.
¨ Re-dialling the yield theme post Brexit. Telco stocks have garnered renewed interest following the unprecedented Brexit outcome and the US federal fund futures market pricing in zero probability of a rate hike for the year (the US Federal Reserve has kept interest rate unchanged at its June meeting). The re-rating bears some resemblance to the yield compression theme that swept across emerging/developed market telcos at the height of the US quantitative easing (QE) programme in 2010-2013 against the backdrop of low interest rates (see our 25 Aug 2015 sector report: Telecommunications : Staying Connected – Aug 2015). With the continuing risk-off sentiment globally, we expect markets/investors to remain supportive of yield-related telcos as haven assets.
¨ SG Telcos score highly on yields. The SG Telco market is the most predisposed to the yield compression theme of the ASEAN-4, with the telcos’ superior dividend yields of 5-6% and larger yield spreads of 2.8% (5-year mean). This compares with MY/TH Telcos’ dividend yields of 3-5%/4-6% and yield spreads of 0.7%/2.1% respectively. Singapore/Malaysia/Thailand bond yields have narrowed by 24bps/25bps/17bps respectively since the Brexit vote and are likely to compress further in the current environments. M1, Advanced Info Service (AIS) and Singtel have the greatest exposure to the yield compression theme, with yield spreads above their long-term means.
¨ Competitive risks are top most concerns in three of the four ASEAN-4 markets. We continue to see competition as key risks for the telco sector in Malaysia, Singapore and Thailand, given the combination of spectrum award/reallocations, potential new entrants and challenges monetising data (pressure on data yields). The telecom regulators in Malaysia and Singapore are in the process of re-farming existing spectrum (via auctions or direct assignments), which will further level the playing field and/or attract new operators. All three telco markets have witnessed marked deceleration in service revenue growth over the last two years on structural legacy revenue weakness and acute data substitution.
¨ IND Telcos remain the most fundamentally attractive. IND Telcos are not regarded as yield stocks (the focus has been more on earnings delivery) and should be insensitive to external/macroeconomic risks/developments, in our view. The sector remains our sole OVERWEIGHT among the ASEAN-4 (we remain NEUTRAL on Malaysia and Singapore, and UNDERWEIGHT on Thailand). This is driven by the industry’s superior growth prospects, the largely benign market competition and undemanding valuations. Telkom Indonesia remains our IND Telcos Top Pick. (Jeffrey Tan)$TLKM $EXCL $ISAT $FREN $BTEL