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Asian telecoms
Data trumps rate increases in 2011
Rising rate environment not supportive for telecoms
Interest rates are on the rise in Asia, which may reduce the attractiveness of the
telecom sector’s relatively high cash flow yields. That said, we believe telecom
stocks’ average normalised free cash flow (FCF) yields at between 8% and 10%
still offer reasonable risk-weighted returns. Moreover, we believe there is scope
for operating trends to surprise positively on the data front.
Wireless data economics are improving
The economics for the high-growth wireless data business are improving. In
particular, we are encouraged by developments to produce cheaper
smartphones and lower the capex costs of adding wireless data capacity. We
are also closely watching how data pricing strategies unfold, with a positive eye
towards those that encourage up-selling to higher-priced plans. On the other
hand, there are also signs that rising data volumes are threatening traditional
revenue streams of voice and SMS.
Sector trading at a normalised FCF yield of 8-10%
In this report, we are introducing a valuation metric, “normalised FCF yield,”
designed to compare our universe of stocks on as much of a like-for-like basis as
possible. According to this measure, 13 of the 31 stocks we examined are
trading at normalised yields between 8-10% (equivalent to 10-12.5x normalised
PER multiples). In our view, this level of valuation suggests the market is
generally pricing the sector for low to no growth, which could prove overly
pessimistic if the data trends continue to improve.
Top picks: Axiata, KDDI, PLDT, SKT and XL Axiata
We are introducing our Top Asian telecom picks for the region. Our top five
Outperforms are: Axiata, KDDI, PLDT, SK Telecom and XL Axiata, a member
of the Marquee list. Our top two Underperforms are: China Telecom and Maxis.
On the radar: China Mobile and DTAC
While not rated Outperform, we highlight China Mobile (Neutral) and Total
Access Communication (Underperform) as two stocks that look quite attractive
on valuation grounds, trading at N-FCF yields of 13.8% and 10.1%, respectively
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