Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 17 Jan 2020, 9:35 AM


Telecommunication - Funnelling Through the Waves

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By Clement Chua l clement.chua@kenanga.com.my

We maintain our NEUTRAL call on the telecommunication sector. The officially launched National Fiberisation and Connectivity Plan (NFCP) with its 5-year plan should keep telco operators busy to achieve the set targets. However, being progressive in enabling the population (especially rural areas) with affordable internet access could bring some hurt to industry players owing to the potentially lower returns on infrastructure capex. On another note, assignment of the 700MHz, 2300MHz and 2600MHz bands for 4Q19 could commence as per the MCMC’s initial timeline, with industry-disruptive mergers being out of the way. Matters considered, we highlight AXIATA (OP, TP: RM4.80) to be the sector’s top pick. We previously did not price the stock to reflect merger benefits and hence kept our SoP-driven TP unchanged. The sell-down from a deal fall-out with Telenor could have overshadowed the market gains posted by the group’s regional operations (namely XL in Indonesia). Further, though much lesser in scale, potential headline merger opportunities would be favourable to the stock if talks materialise.

2Q19 results in line. All companies delivered results per our expectations. For a quick recap; (i) AXIATA saw topline boosted by better numbers in its regional operations with profits buoyed by efficiency gains from larger OpCos (Celcom, XL, NCell), (ii) DIGI’s revenue and earnings’ decline in addition to a downward revision in management’s guidance were anticipated with weaker prepaid results but better margin recorded on operational improvements, (iii) MAXIS saw flattish sales as poorer service revenue (mainly from lower prepaid) was offset by better device sales but was bashed by higher staff cost and depreciation charges, (iv) TM’s weaker turnover (namely from internet and voice) was buffered by its performance improvement plan which translated to a doubling in 1H19 profits, and (v) towerco OCK’s flattish topline came in as expected with expectation for a lumpier 2H.

NFCP in motion. 19 Sep 2019 marked the official launch of the 5-year plan to improve internet quality with assessable and affordable connectivity to rural consumers (refer to the Appendix for the targets and strategies of the NFCP). Overall, an expected cost of RM21.6b would be incurred of which RM10-11b would be from the USP fund. On the flipside, we believe there could be loss in economies of scale in rolling out of the NFCP. For one, less densely populated areas would mean less efficient use of infrastructure and lower returns from the investment involved. Secondly, to cater to the lower income areas, plans have been in place to provide more affordable entry-level plans. We reckon this could have a greater dent to ARPU if it sees a meaningful takeup by more well-to-do consumers but with bare bones needs. Similarly, it is up to the telcos to find equilibrium in achieving the goals with minimal adversity towards their financials by keeping running costs as lean as possible.

Prepping to look pretty. 4Q19 is slated to be the commencement of the assignment process of the 700MHz and 2300MHz spectrums via a “beauty contest” approach (a.k.a. comparative tender). The 2600MHz band are also earmarked for reassignment. These bands play an integral part in expanding the nationwide coverage for 4G LTE and for later repurposing for 5G. This meritbased method as opposed to auctions was on the hope that only the most capable operators can utilise the spectrums most effectively and efficiently. Post-public inquiry feedback in Aug 2019, there were calls to delay the proceeding for the (re)assignments on the back of the then on-going AXIATA-Telenor Asia merger’s due diligence in progress. Now that it has been called off, we do not think there will be any opposition with sticking to the original timeline. Assuming all goes well, MCMC aims to complete the allocation process by 2Q20 (for 700MHz and 2300MHz) and 3Q20 (for 2600MHz) to put them in service in the proceeding quarter. While no mention of an indicative spectrum fee, the previous attempt to allocate the 700MHz spectrum in Oct 2017 came at a price tag of RM987.2m, which some operators expressed should now be discounted.

Maintain NEUTRAL. We recently upgraded TM (in 19 Sep 2019) and AXIATA (in 1 Oct 2019) to OUTPERFORM as we see value to be had post their respective sell-downs. TM was thwarted by its intent to expand aggressively in the mobile business, dragged by on concerns that high operating expenses and additional capex spending would not pan out favourably in the face of the highly saturated and intense mobile scene. Meanwhile, AXIATA is still finding its feet post-merger talk cancellation as we believe investors had high hopes for the success of the deal. We stay unfazed by these headlines as: (i) TM could still reap fruit from its cost savings initiatives and developments in the mobile business may not lead to any substantial changes even in the medium term, while (ii) AXIATA’s expansion in key markets could be clouded by the fallout of the merger, as Celcom’s improving margins and XL’s exJawa penetration is registering strong traction. Additional, speculation on a deal between Celcom and TM could be interesting judging by the respective managements’ agendas. We reiterate our DCF-driven call for TM (OP, TP: RM3.95 – WACC: 9.5%, TG: 1.5%) and SoP-based valuation for AXIATA (OP, TP: RM4.80) unchanged with the latter being our top pick for the sector. No changes were made to calls and earnings to the stocks under coverage from this sector piece.

Source: Kenanga Research - 3 Oct 2019

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