• Out of the five companies under our coverage, three aligned with our expectations, while one came below our estimate, and another one surpassed our projections.

• We are positive on the implementation of a dual network model for 5G. This approach will have the potential to disrupt the monopolistic structure within local telecom industries, leading to reduced fee costs and providing more extensive choices for consumers, including differentiated 5G-related services.

• Maintain an OVERWEIGHT call on Telecommunications sector with a BUY call on TM (BUY, TP: RM6.97 and TIME (BUY, TP: RM6.09)

Decent quarter

The recent corporate earnings season yielded decent results for telecommunications companies. Among 5 companies under our coverage, three met our expectations, one fell short, and another one exceeded our projections. The sector’s 2Q23 top-line grew by 6.6% YoY, driven by significant contributions from Axiata (with a 15.3% YoY growth, mainly due to increased revenue from all operating companies except mobile operations in Nepal and the digital business) and TIME (with a 10.8% YoY growth, primarily attributed to the expansion of recurring revenue, driven by retail customers). Notably, all telco companies we tracked reported improved earnings in the 2Q23, except for Axiata. Note that Axiata incurred a net loss of RM576mn in 2Q23 (due to higher depreciation and amortization expenses) and recorded core earnings amounted to RM44mn, reflecting an 86.7% YoY decrease (primarily caused by a lower share of results from CelcomDigi compared to Celcom's contribution as a whollyowned subsidiary in the previous year).

Telco Players Set to Reap Rewards with Dual Network 5G Rollout

The total subscriber count (i.e. postpaid + prepaid + home fibre subscribers) has witnessed a positive increase. Concerning subscriber expansion, most of the companies under out coverage have shown a decent improvements, except for Axiata, which saw a decrease due to the deconsolidation of Celcom. Looking ahead, we foresee an uptick in subscriber numbers among telecom companies. This rise will be underpinned by enhanced accessibility to budget-friendly mobile devices, advancements in mobile technology like the rollout of 5G networks, successful marketing initiatives, and an increasing prevalence of digital literacy. In regards with 5G phase 2, we anticipate this development will significantly enhance the capabilities of local MNOs in two key areas namely (i) formulating a more practical 5G roadmap and (ii) developing 5G-related products that align with their specific areas of expertise. Once the implementation of the market-driven dual network 5G model becomes more concrete, we believe this will provide a key re-rating catalyst for the sector.

Overweight on the Sector

We maintain an OVERWEIGHT stance on Telecommunications sector with a BUY call on (i) TM (BUY, TP RM6.97) - the main beneficiary in providing services for public and private sector and (ii) TIME (BUY, RM6.09) – positive long-term business and attractive outlook on strong demand for data and data centres.

Source: BIMB Securities Research - 6 Sept 2023