Axiata Group: Telecom shares rally on future earnings prospects

Axiata Group: Telecom shares rally on future earnings prospects

KUALA LUMPUR (NewsRise) — Shares of Axiata Group, Malaysia’s biggest telecommunications operator by market value, have gained as much as 7% this week, leading gains in telecom stocks, as investors bet technology upgrades, healthy overseas operations and fresh forays into potentially high-growth markets would boost earnings of telecom companies in the years ahead.

     Millions of consumers own more than one mobile phone in Malaysia, where the use of smartphones for video calls and internet gaming are fast rising. Telecommunications companies, such as Axiata and Maxis, are expanding their data services as the market for voice has already hit saturation point. A steady increase in e-commerce and social networking applications are driving higher use of smartphones, prompting the telecommunications service providers bulk up their technology security systems and at the same time remain flexible enough to offer a wide variety of applications ranging from gaming to online banking.

     Companies, such as Axiata, are increasingly relying on overseas operations to power earnings as intense competition chokes prospects of brisk growth in domestic market.

     Axiata shares closed 3.5% higher at 6.21 ringgit today, after surging as much as 5.7% earlier Thursday in Kuala Lumpur trading, outperforming the country’s benchmark FTSE Bursa Malaysia’s 0.2% gain. The recent rise helped Axiata pare some of this year’s losses after it shares fell 7.2% in the first six months amid lacklustre earnings.

     The company’s technology upgrade initiative at its Malaysian unit Celcom that dragged for past 18-months and is scheduled to end this month, would help support a raft of new products, analysts said.

     Axiata’s Indonesian unit XL Axiata is expected to fully settle its unhedged U.S. dollar borrowings this month as a sharp drop in the rupiah weighed on earnings.
    “The improving earnings outlook for both Celcom and XL could trigger a further recovery in Axiata’s share price,” Maybank Investment Bank analyst Tan Chi Wei said.
   Apart from Malaysia and Indonesia, Axiata also owns controlling interests in cellular companies in Sri Lanka, Bangladesh and Cambodia as well as strategic stakes in India and Singapore.

     Shares of Axiata have been edging higher ahead of other telecom stocks since October 2 after the company announced that its tower and infrastructure unit edotco Group Sdn Bhd plans to acquire majority control in a telecom tower company in Myanmar for $125 million in cash.
    “We believe edotco is in a position to compete effectively in Myanmar due to scale and access to cash,” said Affin Hwang Capital’s analyst Lim Tee Yang, noting Axiata’s cash reserves amount to 1.8 billion ringgit.

     Maxis, Malaysia’s largest mobile phone network company by subscribers, climbed 4% in the past four trading sessions while state-owned fixed-line operator Telekom Malaysia gained 1% since Monday.
   Valuation of telecom stocks have fallen to a “more appealing level” following a recent sell down, trading at around 22 times forward earnings compared to the five-year average of 21 times, said Kenanga Investment Bank analyst Cheow Ming Liang, who has an Overweight rating on the sector.
    Furthermore, the current market uncertainties could also bode well to the defensive sectors like telecom, he added.
   In the near-term, however, analysts cautioned that Axiata’s focus on high capital expenditure as it ramps up investments toward fourth-generation network could drag down returns.
    “This may imply a lower return on invested capital in the short term, but management is optimistic about higher returns in the medium term when data monetization kicks in through higher average revenue per user and data-led pricing,” Affin’s Lim wrote in a note following an investors meeting on Monday.
    Rising competition meanwhile could erode margins as companies compete for subscribers and revenue.`
   “Competition will become stiffer in 2016” as Axiata’s Celcom unit completes its technology upgrade and launch new products, said UOB Kay Hian analyst Chong Lee Len.

Axiata Group: Telecom shares rally on future earnings prospects