SINGAPORE (BLOOMBERG) - The rally in South-east Asian telecommunications shares this year is unsustainable, given the weaker pace of data revenue growth, according to DBS Bank.
The sector's recent outperformance versus country indexes has been mostly driven by high dividend yields as well as merger and acquisition activity, especially for names like Malaysia's Axiata Group Bhd and DiGi.Com Bhd, analysts Sachin Mittal and Woo Kim Toh wrote in a note.
Both of those stocks are still in the green this year despite steep declines on Tuesday after talks about a business combination were called off. Meanwhile the FTSE Bursa Malaysia KLCI Index is down more than 5 per cent in 2019, the worst-performing market in Asia.
In Thailand, Total Access Communication PCL has climbed 36 per cent this year, more than five times the gain in the country's benchmark. DBS cited increased MSCI index weightings for Thai telecom stocks and easing competition. And investors such as Janus Henderson Group Plc have been eyeing the sector's dividends.
"Our income fund is overweight Thailand, where we like the telecom part of the market, including the telecom infrastructure-supporting stocks and the telcos themselves," said Andrew Gillan, head of Asia ex-Japan equities at Janus Henderson Investors in Singapore.
Meanwhile, South-east Asian data revenue growth has slowed to less than 15 per cent, and this is key as data comprises about 65-70 per cent of the topline for many carriers, the DBS analysts wrote. That level is just "barely offsetting" the decline in the companies' voice and text message revenue, Mr Mittal and Mr Toh said.
DBS still likes telecoms in Indonesia, which it says is "the only market where data revenues are still growing 25-30 per cent per annum."
The analysts prefer XL Axiata Tbk PT, where data comprises 87 per cent of revenue. They also favor Sarana Menara Nusantara Tbk PT for its estimated 40 per cent discount to peer Tower Bersama Infrastructure Tbk PT.