HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 24 May 2019, 10:25 AM


Telecommunications - Muted Tone

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Underperformed in 2018 and regulatory risks remain as the headline for the sector. 700MHz spectrum may be awarded via price auction but we do not expect any bidding war even if this materializes. Reiterate our stance on MSAP that the wireless will benefit at the expense of wired. SST2.0 may haunt the cellcos again if instructed to absorb. Competition is BAU as players are cost focused. Reiterate NEUTRAL with Digi and TIME as top picks.

Bloodshed 2018. Sector’s 2018 performance was painful, with an average loss of 24% vs. KLCI’s 7% decline attributable to regulatory and market competition concerns. Our top pick, TIME’s performance was the steadiest by declining the least along with Maxis (see Figure #1).

Spectrum. 700MHz will enhance operational efficiency thanks to superior propagation feature (Figure #2-4) but the allocation is now delayed till mid 2019 after ASO in 1Q19. Assuming the Big-3 to obtain 2 blocks each, our simulation suggests that gearing levels will remain comfortable while PAT impact to range 3-4%. However, we do not discount the possibility of this prized airwave being retendered based on price in view of the government’s efforts to improve its fiscal position. 2.6GHz airwave will also expire at the end of 2019. Even if auction materializes, we do not expect exorbitant fees.

MSAP. We envisaged and highlighted this concern as early as 2016. We expect TM’s Internet and Data revenues to be negatively impacted and to a lesser extent, TIME. Unlike TM, TIME is not an access provider to rivals in retail market thus price pressure should not be intense. On the contrary, the cellcos should be trumpeting this move as a cost-effective wholesale fibre would allow them to reduce expenditure on high speed transmission backhaul, a paramount ingredient for the success of 4G and beyond.

SST2.0. Cellcos may be instructed by the government to absorb domestic prepaid subs’ 6% levy. However, if the compensation is done in the form of freebies instead of cash outlay, we believe the negative impact will be more manageable. On the flip side, this may reduce the intensity of the competition in the market as telcos grapple to contain this new cost item.

Local demand. Budget 2019 freebies to raise disposable income, spurring private consumption but we do not expect this to benefit telcos due to data monetization challenges.

Yield play. With the expectation that OPR will stay at 3.25%, telcos’ yields are not attractive enough to spur buying interest (Figure #6).

Stronger greenback. Average of RM4.20/USD will lead to higher IDD traffic costs and foreign debt financing (see Figure #7). TIME’s IRU sales proceeds will be higher as majority is dominated in USD.

Competition. Business as usual as Big-3 telcos remain discipline and cost-focused. Pre-to-postpaid migration continues to be motivated by voice-to-date substitution. Gradually, wireless to erode wired’s market share with WTTx solution leveraging on matured 4G and 5G in the future.

Maintain NEUTRAL on the sector due to the lack of positive catalyst in the near term. However, telco remains stable supported by resilient domestic demand. Their dependable dividend yield will be a plus point in a volatile market.

Top picks: Digi (BUY, TP: RM5.10) and TIME (BUY, TP: RM10.21).

Source: Hong Leong Investment Bank Research - 8 Jan 2019

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