PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
28 June 2010
MARKET DATELINE

Telecommunications Recom : Overweight

(Maintained)
Non-Voice Revenue The Key Driver; Upside Potential
To Dividends Too

Table 1: Telecommunications Sector Valuations

EPS EPS GWTH PER P/NTA P/CF GDY
FYE Price (sen) (%) (x) (x) (x) (%) Rec
(RM) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Digi Dec 22.96 139.0 152.4 8.0 9.7 16.5 15.1 25.0 9.9 6.5 OP
Axiata Dec 3.94 24.7 28.5 34.0 15.5 15.9 13.8 2.8 6.2 0.0 OP
Maxis Dec 5.29 33.2 36.2 6.6 9.1 15.9 14.6 n.m 10.3 6.3 OP
TM Dec 3.36 12.5 13.5 -6.1 8.2 27.0 24.9 1.9 4.1 7.8 MP

Sector Avg 16.8 11.3 16.8 15.1

♦ Voice revenue growth slowing, but data revenue growing. Looking Relative Performance To FBM KLCI
forward, we expect voice revenue growth to continue to decline, as voice
minutes are increasingly becoming commoditised and tariffs would continue
Axiata
to be under pressure. However, we see strong growth ahead for the non-
voice services.
TM
♦ EBITDA margins to remain stable. We expect EBITDA margins to remain
Digi
stable mainly due to: 1) mid-to high single-digit revenue growth; 2) greater
FBM KLCI
economies of scale; 3) players’ ongoing cost management initiatives; and 4) Maxis
the shift in players’ focus towards the provision of non-voice services, in
particular, the wireless broadband and data value-added services, which
would help mitigate pricing pressures and higher subscriber/retention costs.

♦ Capital management still on the cards. We are keeping our view that
with the exception of Axiata, the telcos will continue to offer generous
dividend yields to investors on the back of: 1) stable EBITDA margins; 2)
capex spending likely to trend down further; and 3) clean balance sheets. On
top of regular dividends, we believe there is a strong chance that the telcos
would supplement these further with specials. The recent announcement on
Digi’s target capital structure, coupled with its 1Q dividend payout ratio of
close to 100% indicate that Digi will likely continue to declare higher-than-
expected dividends going forward. As for Maxis, we believe dividends are
likely to remain generous, given: 1) management is committed to optimise
the balance sheet; and 2) Aircel’s recent successful bid for both the wireless
broadband internet and 3G licences in India for US$2.1bn as well as network
rollout plan mean that further funding could be required from MCB. We PER = 12x
believe TM has the capacity to return cash above its dividend policy, given:
PER = 11x
1) its healthy cash pile; and 2) Its 200m Axiata shares.

♦ Access pricing review due out anytime soon. The current Mandatory PER = 10x
Standard on Access Pricing is expiring on 30 Jun 2010 and we believe the
review may see the gap between mobile and fixed termination rates narrow
further.

♦ Risks. The key risk is still, in our view, competition. However, we think the Chye Wen Fei
direction of tariffs would still depend heavily on the pricing behaviour of the (603) 9280 2172
incumbent mobile operators and we do not expect irrational pricing to set in. abc
chye.wen.fei@rhb.com.my

♦ Forecasts. Maintained.
KLCI
David Chong, CFA
♦ Investment case. No change to our Overweight stance on the sector.
(603) 9280 2186
david.chong@rhb.com.my
Please read important disclosures at the end of this report.

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♦ Voice revenue growth slowing … With the exception of Digi, voice revenue has been declining since 4Q09
mainly due to a combination of declining MOU, RPM and net adds (Charts 1-3). Looking forward, we expect voice
revenue growth to continue to slow, as voice minutes are increasingly becoming commoditised and tariffs would
continue to be under pressure (hence resulting in declining ARPU).

Chart 1: Minutes of Usage (MOU) Trend Chart 2: Revenue per Minute (RPM) Trend

M inut e s sen

230 34

220 32

30
210
28
200
26
190
24
180
22

170 20

160 18
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

M axis Celco m Digi M axis Celco m Digi

Source: Respective companies data Source: Respective companies data

Chart 3: Mobile Net Adds Trend Chart 4: Broadband Net Adds Trend

'000 '000

500 140

400 120

300 100

200 80

100
60

0
40
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
-100
20
-200
0
-300 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

M axis Celco m Digi Celco m M axis P1 Digi

Source: Respective companies data Source: Respective companies data

♦ … but expected to be mitigated by strong data and broadband revenue growth. While we expect voice
revenue growth to decline further, we see strong growth ahead for the non-voice services, and this is mainly
supported by factors such as: 1) young demographic profile that are internet savvy; 2) acceleration in
deployment of advanced technologies as well as faster and more advanced mobile internet networks; 3) influx of
feature-rich as well as data-optimised handsets and smartphones; 4) falling device prices; 5) mobility lifestyles
and rising popularity of social networking services such as Facebook, Friendster and Twitter; and 6) content and
application availability. A case in point is Celcom, where data revenue/mobile revenue grew from 27.2% in 1Q09
to 30.4% in 1Q10.

♦ We expect EBITDA margins to remain stable mainly due to: 1) mid-to high single-digit revenue growth; 2)
greater economies of scale; 3) players’ ongoing cost management initiatives; and 4) the shift in players’ focus
towards the provision of non-voice services, in particular, the wireless broadband and data value-added services,
which would help mitigate pricing pressures and higher subscriber/retention costs.

♦ Capital management still on the cards. We are keeping our view that with the exception of Axiata, the telcos
will continue to offer generous dividend yields to investors on the back of: 1) stable EBITDA margins; 2) capex
spending likely to trend down further; and 3) clean balance sheets.

On top of regular dividends, we believe there is a strong chance that the telcos would supplement these further
with specials. The recent announcement on Digi’s target capital structure (i.e. net debt:equity that ranges from
35:65 to 45:55), coupled with its 1Q dividend payout ratio of close to 100% indicate that it will likely to continue
to keep dividends attractive going forward. Assuming Digi is to achieve its target net debt: equity ratio of 45:55
by end-FY12/10, we estimate Digi would need to declare another 48 sen/share in addition to our FY12/10 net
DPS projection of RM1.39/share.

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 28 June 2010

We believe Maxis would remain generous with dividends as: 1) management is committed to optimise the
balance sheet; and 2) Aircel’s recent successful bid for both the wireless broadband internet and 3G licences in
India for US$2.1bn as well as network rollout plan mean that further funding could be required from Maxis
Communications Bhd (MCB). This could put pressure on Maxis to declare higher dividends. Maxis targets a total
net DPS of 35 sen for FY10 and we estimate additional net DPS of around 13 sen (2.5% yield), assuming net
debt/EBITDA reaches 1x by end-2010.

While TM has yet to provide any firm commitment to pay shareholders in excess of its minimum dividend of
RM700m p.a. (and a firm commitment is likely to be made only after a decision is made on the US$250m due
end-2010), we believe TM has the capacity to return cash above its dividend policy, given: 1) its healthy cash
pile and gross debt/EBITDA of RM3.9bn and 2.3x as at 31 Mar 10 (vs. gross debt/EBITDA comfort zone of 2-
2.5x); and 2) its 200m Axiata shares, which will immediately raise its cash pile by RM788m or 9.3 sen/share
upon monetisation.

For Axiata, management revealed that it is in the midst of formulating a dividend policy (and it is expected to be
announced by 3QFY12/10). We estimate a full-year DPS of 8.6sen (which in turn translates to a net yield of
2.2%), assuming: 1) a dividend payout ratio of 30%; and 2) dividends are declared from FY12/11 net profit.
However, in our view, Axiata is still very much a growth stock, given its exposure to emerging markets.

♦ Access pricing review due out anytime soon. The current Mandatory Standard on Access Pricing is expiring
on 30 Jun 2010 and we believe the review may see the gap between mobile and fixed termination rates narrow
further. If that happens, potential beneficiaries including TM (higher fixed termination rate and lower mobile
termination rate) and Digi as both these companies have a relatively smaller customer base. On the other hand,
this would likely affect both Celcom and Maxis, although Maxis’ management had previously said that the impact
is likely to be insignificant.

Risks

♦ Risks to our view. These include: 1) weaker-than-expected subscriber additions; 2) execution (such as
network upgrades and expansion); and 3) all-out price war.

Forecasts

♦ Forecasts unchanged. We are keeping our forecasts unchanged for the operators.

Valuation & Recommendation

♦ Axiata – improvements gaining momentum, but potential writedown on Idea may dampen
sentiment. We continue to like Axiata for its strong earnings growth, driven by operational improvements from
all main subsidiaries, namely Celcom, XL, Dialog and Robi. Earnings momentum aside, we believe concerns on
whether Axiata would write down its investment in Idea would remain in the near term. While this may affect
sentiments, we highlight that the impairment (if any): 1) is a non-cash item; 2) would not impact our core net
profit forecasts; 3) does not affect our SOP-derived fair value; and 4) is not likely to impair Axiata’s ability to
pay future dividends.

♦ Digi – iPhone to drive data revenue growth, and better clarity on recurring dividends now. Looking
forward, we believe Digi’s key revenue growth drivers include: 1) further penetration into the underserved
markets; 2) market share gains for existing subscribers; and 3) continued focus on CRM activities to upsell to
existing customers. Beyond 2010, non-voice revenue should start to contribute more significantly. Digi recently
announced its target capital structure, which we believe would help provide investors better clarity as to its
future dividends. Also, its target capital structure, i.e. net debt:equity that ranges from 35:65 to 45:55 indicates
that it could possibly declare higher-than-expected dividends.

♦ Maxis – riding on rising data traffic and dividends could surprise on the upside. We believe Maxis is in a
strong position to capture the rising popularity of mobile broadband and strong data revenue growth, given its
large customer base with a relatively higher proportion of postpaid subscribers, which we believe are typically of
higher value relative to its rivals given that the majority of Maxis’ customers are in the more affluent regions of
Peninsular Malaysia. These customers, we think, are also likely to be early adopters of technology and this would

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 28 June 2010

be positive in terms of adoption of wireless broadband and smartphones. We note that Maxis’ 1Q dividend
surprised on the upside and we believe its ongoing capital management should keep dividends attractive.

♦ TM – All eyes on HSBB and potential special dividends. We believe the attention on TM would still remain
on the recently launched UniFi service (i.e. High Speed Broadband service). Since launch on 26 Mar 10, the UniFi
packages registered a take up of approximately 2,400 customers (as at end-May 10). Management is positive
that the take-up would increase significantly in the remaining months of FY10 as it is on track to extend its
coverage from 4 areas currently to 22 areas by Jul 10 and 48 areas by end-10. In our view, TM’s investment
thesis has not changed, i.e. a dividend policy that offers investors the comfort of a minimum dividend income
stream.

Chart 5: Axiata Technical View Point

♦ The share price of Axiata accelerated in Feb 2010,
after forming a base at above the RM3.30 level for
about one month.

♦ The stock surpassed the RM3.70 level in early Mar

and surged to a high of RM4.05, but swiftly fell
back to below the RM4.00 level on profit-taking
pressure.

♦ Thereafter, the stock has failed to recross the

resistance level of RM4.00 and began a sideways
trend from RM3.70 to RM4.00.

♦ In May, the stock briefly fell off the RM3.70 level,

but it was followed by a powerful rally, which led
the stock to a retest to the RM4.00 hurdle.

♦ Last week, the stock eased from RM4.00 before

closing the week at RM3.94.

♦ Although the stock registered a positive candle,

bouncing up from the 10-day SMA to indicate
follow-through buying support, the momentum
indicators are showing poor reading.

♦ Chances are, it may continue to fail in its attempts

at the resistance level of RM4.00.

♦ In our view, the sideways trading within RM3.70 –

RM4.00 should prevail going forward.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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