PCCW's yield differential vs HKT narrowing

It is the narrowest it has been since HKT listed.

According to Barclays, PCCW now yields 5.3% of 2012E earnings, vs HKT’s 5.7% yield, and the differential is the narrowest it has been since HKT listed. Year-to-date, HKT is up 66% vs PCCW’s 18% rise and a 7% rise in the HSI. PCCW stock has considerable value – what holds it back is a lack of investor confidence.

Here's more from Barclays:

A higher PT for HKT (to HK$7.75 in our concurrently published note on HKT, up from HK$7.20) drives a higher value for PCCW’s stake and offsets lower values for other PCCW businesses – hence, our HK$3.80 PT for PCCW is unchanged. We retain our OW rating on the stock.

Value, but little confidence: PCCW now trades at a 26% discount to its stake value in HKT alone, let alone the NOW TV and IT businesses and the PCPD stake being available for free. And then there is the c5% yield commitment for two more years. We believe the stock has considerable value – what holds it back is a lack of confidence, in our view. Our conversations with investors indicate concerns on value-dilutive use of cash proceeds.

We see two potential positive sentiment catalysts: 1) British Premier League (BPL) re-bidding is on now – if PCCW wins the rights back (from i-Cable) we see this as a positive sentiment catalyst; and 2) domestic free-TV licensing in Hong Kong – PCCW is one of the three applicants (the others being i-Cable and City Telecom); there is no visibility on the timeline on this though.

Dividend yield catching up with HKT: PCCW’s dividend yield is now 5.3% – this compares with HKT’s at 5.7%. We see dividend yield parity as likely driving more interest from investors in arbitraging between PCCW and HKT.

Earnings revisions on lower NOW TV margins: Given the company’s greater focus on content development and exporting content geographically (incurring start-up costs), we do not expect NOW TV margins to recover materially into 2013 and 2014. Our lower margin assumptions drive cuts to our earnings estimates; we also incorporate lower multiples into our sum-of-the-parts valuation given the resulting lower growth.