Priciest Malaysian Phone Stocks Get Top Fund to Ride Gain

Investor demand for bigger dividends and smaller stock swings has pushed Malaysian telecommunications shares to record valuations and convinced at least one of the nation’s top-ranked fund managers the rally isn’t over.

The MSCI Malaysia Telecommunication Services Index has climbed to 24 times estimated earnings, the highest level since Bloomberg began tracking the data in 2006 and the most expensive among peers in emerging and advanced nations. Telecommunications shares pay the biggest dividends of nine industries in Malaysia, where stock volatility is lower than any major market worldwide.

While Samsung Asset Management Co. is avoiding the companies after valuations surged, Hwang Investment Management Bhd.’s David Ng says he’s hanging on to shares of Axiata Group Bhd. and DiGi.Com Bhd. that rallied at least 29 percent this year and helped his Hwang Select Dividend Fund beat 97 percent of peers. The companies, which benefit from growing demand for smartphones in Southeast Asia’s third-biggest economy, pay dividend yields that exceed returns on Malaysian bonds.

“Dividend stocks have done well because a lot of these businesses are more stable,” Ng, who oversees the equivalent of $5.6 billion as the chief investment officer of Hwang Investment in Kuala Lumpur, said in a phone interview on Oct. 16. “Investors just want income and certainty.”

Riskless Return

The MSCI Malaysia telecommunications index has surged 32 percent this year, the most among nine industry gauges and about six times more than the 5.6 percent increase for the broader MSCI Malaysia Index. The measure of telecommunications companies climbed 3.8 percent when adjusted for volatility, the top risk-adjusted return among MSCI Inc.’s telecommunications indexes in 41 nations, data compiled by Bloomberg show.

The MSCI Malaysia telecommunications index rose 0.2 percent today to its highest close since Oct. 19. Telekom Malaysia Bhd. and Maxis Bhd. were among the top gainers on the benchmark FTSE Bursa Malaysia KLCI Index, which climbed 0.2 percent to a record. The MSCI Emerging Markets Telecommunications Services Index rose as much as 0.6 percent, the only gainer among 10 industries in the broader MSCI Emerging Markets Index.

The rally in Malaysia has been fueled by increased revenue from mobile data services, which may continue as smartphone prices fall in the nation of 29 million people, according to K&N Kenanga Holdings Bhd., an investment banking group partly owned by Deutsche Bank AG, in a report dated Oct. 18.

Weak global growth has also boosted the appeal of companies whose profits are more resilient during economic slowdowns, according to Ng, who also owns shares of Kuala Lumpur-based Maxis, Malaysia’s second-biggest telecommunications company by market value. His Hwang Select Dividend Fund has returned 26 percent this year, according to data compiled by Bloomberg.

Sustainable Dividends

Per-share earnings for the MSCI Malaysia Index’s telecommunications gauge have climbed 25 percent during the past 12 months, twice as much as the 12 percent increase for the broader MSCI measure, according to data compiled by Bloomberg. Dividends for the telecommunications index increased 26 percent, while they fell 8 percent for the broader measure of Malaysian shares.

“Malaysia telecoms are doing well because of dividends,” Mark Mobius, who oversees about $48 billion as the executive chairman at Templeton Emerging Markets Group, said in an Oct. 12 interview in Singapore. “In the long run, this will sustain.”

DiGi, controlled by Norway’s Telenor ASA, reported a 7.8 percent increase in third-quarter profit to 315.4 million ringgit ($103 million), driven by an increase in mobile Internet customers, it said in a statement yesterday. The company announced a special dividend of 8 sen a share on top of an interim dividend of 4 sen.

Recovery Signs

Malaysian Prime Minister Najib Razak cut personal income tax, raised civil servants’ minimum pensions and repeated cash handouts to low-income households in his budget speech last month, after increasing civil servants’ salaries in the past year to boost domestic consumption.

An increase in investor appetite for riskier securities may hurt the performance of Malaysian telecommunication stocks, Anthony Yau, the Hong Kong-based head of Asian Emerging Markets Active Equity at State Street Global Advisors, said in an Oct. 17 e-mail.

Reports last week signaled China’s economic growth picked up in September, while U.S housing starts surged to a four-year high. Malaysia’s expansion unexpectedly accelerated in the second quarter as construction and consumption increased. The Malaysian Institute of Economic Research raised this month its forecast for growth next year to 5.4 percent from a 4.7 percent estimate in July.

Yields Falling

Dividend yields have fallen as the stocks rallied. The average yield of stocks in the MSCI Malaysia telecommunication index has dropped to 3.9 percent from 4.3 percent a year ago, according to data compiled by Bloomberg. Their yield advantage over government bonds shrank to about 0.5 percentage points from 0.7 percentage points, according to JPMorgan Chase & Co.’s GBI-EM Malaysia index.

“It’s probably starting to get a bit excessive now in terms of valuations,” Alan Richardson, who helps oversee about $82 billion for Samsung Asset Management, said by phone from Singapore on Oct. 16.

Yields for Malaysia’s telecommunications shares are still higher than the 2.7 percent average payout for companies in the MSCI Malaysia index, data compiled by Bloomberg show.

Malaysian government-linked funds that invest most of their money in local markets may provide support for telecommunications shares and curb volatility, according to Tan Lip Kwang, who helps manage the equivalent of $1 billion at K&N Kenanga. Local institutions accounted for 48 percent of the 31.5 billion ringgit of shares traded on the Malaysian exchange last month, compared with 28 percent by foreigners, according to data on Bursa Malaysia’s website.

‘Safe Harbors’

The 30-day historical volatility for the MSCI Malaysia Index, a measure of share swings, was 7.6 yesterday, the lowest among MSCI indexes in developed and emerging markets, according to data compiled by Bloomberg.

“The structure of our market means participation is mostly by government-linked companies,” Tan said by phone. “During all these uncertainties, they need to find some safe harbors to park their money, and telco is one of them.”

The Employees Provident Fund, Malaysia’s largest pension fund, owns a 12 percent stake in Axiata, the nation’s biggest listed telecommunications company by market value, according to data compiled by Bloomberg. The fund holds 7.2 percent of Maxis and 16 percent of DiGi.

All three stocks have dividend yields of at least 3.4 percent, data compiled by Bloomberg show.

“We are not selling,” said Hwang Investment’s Ng. “So long as interest rates remain low around the world, and so long as inflation remains well-behaved, then the demand for yield will continue.”

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