I have previously written that the telecommunication sector is at a sweet spot of being undervalued and has a high forecasted earnings growth rate in Malaysia.
Now, I am looking at the specific companies that fit this criteria.
Here is the stock screener that I used from investing.com to screen for the companies in the telecom sector
How I am Selecting the 5 Companies to Research
Firstly, I look at two main valuation metrics here — price-to-earnings (PER) and price-to-book (PBR) ratios.
PER should be below 10 times, while PBR should be below 1 times. But nothing is perfect, so I will exercise some judgment.
The first company I identified is Amtel Holdings, as it is trading at PER of 8.3 times and PBR of 0.6 times. Both criteria suit.
Then, I identified Axiata for its PBR of exactly 1 time even though it is currently loss-making. I am looking at it because it is one of the biggest telecom companies.
Next, I decided to look at Telekom Malaysia as I liked that the PEG ratio is low (more on this later) while PER is ok at 13 times even though its PBR is expensive at 2.6 times.
For the fourth company, I opted for CelcomDigi, the newly merged company, as again, I liked that the PEG ratio is low.
Finally, I am researching Maxis just because of the sheer size of the company.
In-Depth Objective Research
Amtel Holdings
Background: Amtel sells and installs GPS and vehicle-automated systems (think of the screen in front of the car with all the functions of a smartphone) in vehicles. It is also involved in the installation, testing, and jointing of telecommunications and fibre optic cable infrastructures.
Core Businesses: The GDP and vehicle automated systems business is its core business at 83% of revenue, while its civil telecom business makes up the rest. All of its business is centred in Malaysia.
Pros: Amtel is currently trading at cheap valuations of PER of 8.3 times and PBR of 0.6 times. Historically, Amtel’s PER traded at an average of 18.9 times in the past 5 years. Its PEG ratio of 0.13 times is very attractive.
A bit of 101. PEG is PER divided by the earnings growth rate. It measures how ‘cheap’ or ‘expensive’ to buy a company for 1% of the growth in earnings. The lower it is, the cheaper it is to buy 1% of the company’s earnings growth and vice versa.
Its financial performance has been quite solid, too. Revenue grew by 10.6% and 18.5%, respectively, in 2022 and 2023, as demand for more sophisticated vehicle technologies increased in line with the proliferation of electric vehicles. Profits have also doubled to RM5.6 million in 2023.
Furthermore, Amtel is quite efficient. It yielded a return on asset (ROA) and return on equity (ROE) of 6.6% and 8.2%, respectively, compared to the sectors’ averages of 2.1% and 3.7%.
Cons: In the most recent quarter (3Q 2024), its revenue and profits declined by 4.4% and 20.8%. Not worrying yet considering that it had 6 quarters of positive growth before this but it is a sign that cannot be ignored.
It doesn’t give any dividends. That in itself is a big con in my books.
Furthermore, it is a small-cap stock with a market capitalisation of RM50 million. It is volatile and easily manipulated by traders. I don’t like this at all.
Lastly, its share price movement for the year has been negative. It has declined by 16.8% since the beginning of the year.
Analyst Consensus: No research houses have covered it, so I am relying on the report prepared by AlphaIndicator here. It gave it an 8 score (higher than the telecom sector average) on how good the company is, with valuations and financial performance being its strong points.
Axiata
Background: Axiata provides and builds telecommunication services and infrastructures.
Core Businesses: Mobile is their core business, generating 82% of its revenue, followed by infrastructure (9%), and fixed broadband (5.3%). Surprisingly, Axiata’s core country is Indonesia, generating close to half of its revenue. This is followed by Bangladesh (19%), Sri Lanka (12%) and Malaysia (9%).
Pros: It is a very well-diversified company in terms of which countries it operates in.
It has performed well in its financial performance. Revenue grew by 10% in 2023 to RM22 billion. In the latest quarter (3Q 2024), profits rebounded to RM135 million from a loss of almost RM1 billion in 3Q 2023.
Maybank has forecasted that Axiata will return to profitability in the current fiscal year.
Axiata has a consistent dividend policy, with a current dividend yield of 4.3%, the highest in the past 5 years. This means its share price is relatively low now to afford to buy Axiata for some of its dividends.
Cons: It is still loss-making. But the losses come mainly from recognised losses in some of its investments and also negative contributions from its minority stakes and joint ventures.
But the concern is its high debt. Axiata pays a lot in interest expense every year and quarter, which will eat into their profits. Its current ratio (which measures its ability to repay short-term obligations) is below 1, which means that it doesn’t have enough assets now to repay its short-term obligations.
Axiata is not efficient. Its return on asset is at -1.1% compared to its peers average of 4.2%.
Analyst Consensus: Analysts have Axiata at a target price of RM2.78, with an upside of 19.5%.
Telekom Malaysia
Background: Telekom provides fixed-line, broadband, WiFi, cloud data centre, cybersecurity, IoT, and smart services.
Core Businesses: Its WiFi business, Unifi, remains its biggest revenue contributor at 46%, followed by TM One (26%) and TM Global (25%). Malaysia is still the core country of business, generating 88% of its revenue.
Pros: Right now, Unifi is close to a monopoly on fixed broadband or WiFi services in Malaysia. There is a total of 4.6 million fixed broadband subscribers as of 2023, while Unifi has 3.1 million, taking up 67% of the market.
Financial performance is ok. Revenue grew by 1% to RM12.3 billion in 2023, but profits ballooned by 63% to RM1.9 billion.
Its operations are also excellent. Return on asset stands at 8.2% compared to its peers’ average of 2.6%.
Most importantly, it has a consistent dividend policy, with the company paying 50% of its profits in dividends to investors even though the dividend yield is only at around 4.4%.
Cons: In the recent financial quarters, revenue has been on a downhill. It declined by 3.9% and 6.2% in 1Q 2024 and 2Q 2024 respectively. Meanwhile, profits also plunged by 30% to RM396 million in the latest quarter.
Analyst Consensus: Analysts have Telekom Malaysia at a target price of RM7.59, with an upside of 19.2%.
CelcomDigi
Background: CelcomDigi is the newly merged company from Celcom and Digi, and provides telecommunication services such as postpaid, prepaid, broadband and roaming.
Core Businesses: Mobile telecommunication services remain its biggest revenue driver at 86%, followed by electronic devices (14%). All of its business is in Malaysia.
Pros: Since it was first merged by the end-2022, it is no use to analyse its annual performances. Hence, quarterly it is. In the past 3 quarters, only profits have grown at a strong rate as the merger achieved some cost reduction and efficiencies.
With the merger of CelcomDigi, it became the largest player with 46% of the mobile market share in 2024, followed by Maxis (23%) and UMobile (21%).
Being a very mature company, it has a consistent dividend policy, with dividend yields at 3.9% now. It gives out almost all of its profits in dividends.
Meanwhile, its PEG ratio is low at 1.0 times, which makes it cheap to buy for its earnings growth.
Cons: Unfortunately, while the merger made CelcomDigi the biggest one in Malaysia, it didn’t really improve the company. Revenue was flat for the past 3 quarters, while its operations actually became more inefficient from previous years.
Return on asset was around 10% to 15% before this, but it has declined to only about 4% now.
Meanwhile, research houses have been hammering the company as it has missed expectations for 3 consecutive quarters.
Valuations are expensive currently with PER of 25 times.
Analyst Consensus: Analysts have CelcomDigi at a target price of RM4.14, with an upside of 15.9%.
Maxis
Background: Maxis sells you mobile phone plans and services, and also WiFi.
Core Businesses: Mobile telecommunication services remain its biggest revenue driver at 69%, followed by electronic devices (16%). All of its business is mostly in Malaysia.
Pros: Quite a strong position in the mobile plan services — number 2 in Malaysia. It used to be number 1 but at least it didn’t get the scrutiny about anti-trust from the government like CelcomDigi did.
Financial performance has been steady. Revenue grew by 3.1%, 4.7% and 5.5% in the 3 quarters of 2024, while profits grew even stronger at 10.3%, 7.9%, and 27.5%.
Meanwhile, it gives a decent dividend yield of 4.5% while it has promised to give out almost all of its profits in dividends.
Fairly good operations. Return on asset is at 5.0% compared to the peers’ average of 2.6%.
Cons: Like Axiata, it is heavily in debt. 40% of its assets are in debt. Its current ratio is low at 0.52 which means it doesn’t have enough liquid assets to cover its short-term obligations.
It is also under threat from CelcomDigi, as it has continued to take market share from Maxis.
Maxis is also expensive to buy at a PER of 24 times.
Analyst Consensus: Analysts have Maxis at a target price of RM3.87, with an upside of 8.9%.
