Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 27 Nov 2020, 11:02 AM


Telecommunications - Another Window Opens

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We maintain our NEUTRALratingon the telecommunications sector. The newly initiated JENDELA (Jalinan Digital Negara/National Digital Network) looks to refresh the priorities of the NFCP and existing industry efforts. This includes emphasising 4G and fiberise national connectivity while shelving the previously anticipated 5G rollout. Meanwhile, the retirement of the3G network by 2021 could beon the table should certain milestonesbeachieved.Going into 4QCY20, mobile players are expected to engage in further price wars with“unlimited” data plans risking ARPU dilutions as consumersshop for more value-for-money offerings given income/economic uncertainties. To further stir the market, U Mobile’s listing seems closer to becoming a reality, expectedby4QCY20.We highlight TM (OP; TP: RM4.95) as our Top Pick.We view fixed line operators are safe haven within the telco space amidst the intensifying competition in the mobile segment. Additionally, we view TM to be one of the stronger beneficiaries from JENDELA’s targets as it accelerates market penetration and could also solidify its role in deployingtheeventual 5G networkalbeit further down the road. More homebound work arrangements also keep demand for fixed broadband sticky, with TM being the dominant player in the market. Amongst mobile operators, we prefer DIGI (OP; TP: RM4.65) as we anticipate its industry-leading efficiencies to allow more legroom in adaptingtothe tougher market and cushion earnings risks. Its solid dividend yield (c.4%) is also a plus.

2QFY20 results mostly as expected.Forthe 2QFY20 reporting season, we deemed most telcos to have reported earnings within our expectations (save for AXIATA which performed much worse-than expected). Overall, sequential weakness was anticipated (from 1QFY20) amongst mobile operators as ARPUs were diluted by government-spurred data initiatives to relieve consumers’ burden during the MCO. Fixed line and broadband operators on the other hand, experienced greater dependency given the widespread adoption of working-from-home arrangements. Going forward, we are hopeful for 3QFY20 to pick up with the return of customer acquisition activities and installation works to pick up from the re-opening of business activities. That said, corporates are still cautious from the MCO-induced economic downturn and persist to withhold earnings guidance. Consumers may continue tightening their pockets amidst income worries and SMEs are facing challenging times, though we believe most of the damage would have already been felt during 2QFY20 itself, being fully exposed to the MCO.

Strengthen foundations first. On 29 August 2020, the government announced JENDELA as the new national infrastructure plan aimed to enhance national digital connectivity. In a recent interview with Bernama, MCMC Chairman, Dr Fadhlullah Suhaimi described the revised goals to better tend to needs brought about by Covid-19 new normals, which the NFCP might not be completely able to address. The expected cost realise JENDELA stands to be not less than RM21b, similar to what was tabled for the NFCP. The aspirations for Phase 1 of 2 are to achieve the following by 2022 (refer to the overleaf for the remainder of JENDELA’s aspirations):

• Improve 4G coverage from 91.8% to 96.9% in populated areas;

• Increase mobile broadband speeds from 25Mbps to 35Mbps; and

• Expand fibre broadband access to 7.5m premises (from 4.95m premises).

The targets above are also meant to improve our national 5G readiness, greatly decelerating previous ambitions to deploy and commercialise the network by this year. On the flipside, this could bring some relief to telcos as capex commitments for near-term would be prioritised on improving their existing backbone. We had previously anticipated previous 5G projections could only yield minor returns as it will likely be enterprise-focused in small clusters and not widely available for general population. Some hurdles would have included the unaffordability of 5G devices to the average consumer. However, there is a lack of clarity to the intended method of assignment for the necessary spectrum (previously allocated 700MHz and 3.5GHz spectrums) and whether an award via consortium would still be sought. On another note, MCMC expressed its intentions to retire the 3G network by 2021, suggesting for satellite broadband to connect remote areas.

We maintain NEUTRAL on the telecommunications sector. With the mobile segment experiencing a paradigm shift from the introduction of new offerings, we see stability within the fixed line and broadband products which are proving more essential whilst expected to see growing penetration on the back of JENDELA targets. For that, we favour TM (OP; TP: RM4.95) as our Top Pick for 4QCY20.Asidefrom the aforementioned reasons, we anticipate TM to be more cash accretive from cost saving initiatives anticipated from potential plans by new management. We suspect these to include contract re-negotiations with vendors and manpower reorganisation to boost efficiencies in certain business units. Additionally, though only likely down the longer road ahead, TM could play a meaningful role in the eventual deployment of the 5G network on the back of its extensive fibre network to support its backhaul. Commanding industry leading margins should enable the group to operationally manoeuvre around industry hurdles while keeping profitability in check. The brand could experience the lowest risk of downtrading as it commands the lowest ARPU amongst its competitors with the greatest Prepaid mix. In spite of all this, the stock still offers the highest dividend yields in the sector (c.4%). Meanwhile, we tone down our SoP-driven TP for AXIATA (MP) to RM3.20 (from RM3.35, previously) as we adjust for lower contributions from Robi (68.8% owned), which is seeking listing in the coming months.

ARPU pressures continue. During the 2QFY20 MCO-quarter, mobile ARPUs mostly fell as customers benefited from the provision of free 1GB mobile data for specified hours during the MCO. Although this has been extended further until 31 Dec 2020, it is now limited to only learning and productivity applications. Only MAXIS’ Hotlink Prepaid registered an uptick in ARPU, which could be attributed by its “Unlimited” plans at RM35/mth and RM45/mth introduced in the month of June. These mobile packages are starting to garner the attention of consumers who are willing to compromise on data speed caps but enjoy limitless consumption of content at affordable price ranges. Besides the pioneer U Mobile’s GX30 (RM30/mth) and GX38 (RM38/mth) Prepaid plans, Celcom Xpax also offers planat RM35/mth. While DIGI has yet to introduce a fully encapsulating unlimited product, it offers a RM28/month Prepaid NEXT package which offers a 6GB capacity but with unlimited capacity for heavily used social media and video platforms (i.e. Facebook, Instagram, Twitter, Youtube).

In the coming quarters, consumers are expected to seek more wallet-friendly commitments as income and economic uncertainty lingers, especially with the bank loan moratorium coming to an end. Additionally, as homebound usage increases, it is possible that consumers could allocate their overall budget towards a better home broadband experience to serve their daily needs. We have already seen signs of the derailment of Prepaid-to-Postpaid trend during 2QCY20. With regards to this, we believe MAXIS could be the most at risk from downtrading, with its dominant Postpaid market share amongst the Big-3 telcos (38%) as well as the highest Postpaid ARPU (RM85/mth) and Prepaid ARPU (RM40/mth) (refer to Appendix: 2Q20 Postpaid and Prepaid Statistics).

U Mobile listing back on again? U Mobile’s long-awaited IPO has once again resurfaced with hopes of materialising as soon as 4QCY20, with an expected market cap valuation of RM10-11b. It is thought to garner EV/EBITDA valuations of 12.0x which stands well with industry peers. Still, its listing might finally provide clarity to the true market share structure where the Big-3 have been reduced to holding between 17-27% share in either Postpaid and Prepaid. Aided by the scarcity of investable options in the telco space, it might not be too farfetched if U Mobile could be traded at a premium from the incumbents, thereby resulting in a domino effect of valuation inflation.

Source: Kenanga Research - 6 Oct 2020

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