Investment Highlights

• NFCP officially launched. We attended the launch of the National Fiberisation and Connectivity Plan (NFCP) by Deputy Prime Minister Datuk Seri Dr Wan Azizah Wan Ismail, which was organised by the Malaysian Communications and Multimedia Commission (MCMC) yesterday. She recalled NPFP’s 5-year targets, which we had highlighted in our earlier updates, as follows:

i) Entry-level fixed broadband packages at 1% of gross national income (GNI) by 2020;

ii) Gigabits availability in selected industrial areas by 2020 and state capitals by 2023;

iii) 100% availability at a minimum speed of 500Mbps in state capitals and selected high-impact areas by 2021;

iv) 20% availability at up to 500Mbps in sub-urban and rural areas by 2022;

v) Fibre network coverage at 70% of schools, hospitals, libraries, police stations and post offices by 2022;

vi) Average speeds of 30Mbps in 98% of populated areas by 2023; and

vii) Improved mobile coverage along the Pan Borneo Highway upon completion.

Under the NFCP, the current 1.9mil premises with fibre access have to be increased by 1.5mil by 2021, 502K premises with Gigabits access have to be increased by 3mil by 2023, expand 25 industrial areas for Gigabits access by next year, 121K suburban and rural premises have to be increased by 1.2mil by 2022, another 6,195 towers (+18%) to be built by 2023 to expand 4G + coverage, and to widen coverage to 1,177 Felda and Orang Asli settlements by 2023.

Achieving these targets requires: i) heavy investments which could reach RM21.6bil, of which RM10–RM11bil will be funded from the MCMC’s Universal Service Provider fund; ii) sharing access to passive telco and civil infrastructure amongst operators and stakeholders; iii) continuous technology improvements; iv) optimising spectrum allocation for higher quality services; v) improved regulatory framework and policy certainty to support new investments in 5G; vi) reduction of costly, bureaucratic and uncoordinated state-level right-of-way in building telco infrastructure; and vii) improved regulatory coherence and consolidate action from all stakeholders to address issues on the ground.

• Negative revenue outlook for NFCP players. Under the 11th Malaysia Plan, GNI is expected to reach RM47,720 by 2020. An entry-level package amounting to 1% of GNI translates to only RM40/month. This is half of TM’s Unifi Basic currently priced at RM79/month for 60GB data vs Celcom’s RM80/month for 30Mbps, Maxis’ RM89/month for 30Mbps, Time dotCom’s RM99/month at 100Mbps and Digi’s RM99/month at 50Mbps. For further comparison, TM’s 2QFY19 Unifi ARPU average was higher at RM177/month.

Hence, the government may again be looking at further broadband price cuts next year, which will negatively impact the average revenue per user (ARPU) trajectory of broadband network owners such as TM and Time dotCom. However, the margin impact may be largely mitigated for third-party operators like Maxis, Axiata’s Celcom and Digi, who may be leasing TM’s fibre network at correspondingly lower rates.

• Higher capex, borrowing costs and depreciation for TM. Given TM's role as the national broadband provider, the group will likely bear up to half of the NFCP cost, which translates to RM2.2bil over the next 5 years. Besides TM's own capex requirements, the NFCP rollout alone translates to 19% of FY20F revenue – already above management's FY19F capex target of 18% and 8% in 1HFY19. Additionally, the thrust of the NFCP towards connecting the rural population could mean that revenue accretion from these investments will be minimal.

The earnings impact to TM will snowball as its capex mounts up to 2025 as higher borrowing costs and depreciation charges will gradually erode the group’s earnings. Doubling TM’s annual capex of RM2bil currently will slightly cut its net profit by 3% in FY20F but gradually worsen by 10% in FY21F, 19% in FY22F, 30% in FY23F, 48% in FY24F and 49% in FY25F under a worst case scenario. Nevertheless, we highlight that part of the NFCP spending may already be included in TM’s existing capex programme.

• These costs exclude additional 5G spectrum fees and rollout capex. While 5G standards are expected to be finalised in April next year, these trials cover the usage of the 3.5GHz bandwidth and 22 millimetre wave lengths. 5G spectrum allocation has not been determined at this stage as it depends on the results of the trials, state of the ecosystem and device/equipment availability. While the MCMC alluded to a fair price for the spectrum to facilitate the rollout of this vastly faster service, we expect these additional fees and capex, which could be up to 10x 4G spending levels, to further raise the gearing levels of mobile operators.

• Maintain NEUTRAL outlook on the sector given the escalating NFCP-driven capex requirements against the backdrop of government-targeted fiberized ARPU reductions. Our only BUY currently is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

Source: AmInvest Research - 20 Sept 2019