Summary

• We have undertaken an analysis of consolidation prospects for the sector given the unrelenting price pressures in the cellular sector and increasingly in the fixed broadband market with the emergence of new players. Multiple synergistic benefits for consolidation, which could re-rate the sector and attract needed investments for upcoming 5G rollouts, are:
  • Offering consumers a comprehensive suite of cellular and fibre broadband services to provide back-up support service support, especially for critical enterprise solutions;
  • Revitalising top-line growth by lowering competitors, re-establishing monopolies or offering a dual-branding strategy;
  • Intensifying cost efficiencies by reducing overheads given redundancies in head office, marketing and service stations;
  • Generating economies of scale from a bulk purchasing and streamlining of cost centres;
  • Improving investment and credit rating profiles from enlarged market capitalisation and stronger balance sheets.
• Various M&A permutations are possible among the 6 main operators with substantive network infrastructure and subscriber market share. We have narrowed down the possibilities into 3 scenarios:
  • Scenario 1: Revisiting the Telekom Malaysia (TM) & Axiata re-merger. Assuming a 10% cost reduction would mean substantial annual savings of RM2.2bil and together with a targeted FY21F EV/EBITDA of 5x could drive up the combined market capitalisation by 52%.
  • Scenario 2: Relooking the Axiata & Telenor-Digi merger. Management from the earlier abortive merger guided for 5-year synergies up to RM15–20bil in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale. This alone translates to a DCF enhancement of 24%–32% from the combined Axiata-Digi market capitalisation.
  • Scenario 3: TM and Time dotCom merger. If the merged entity is able to reduce Time's operational costs by 20% while re-establishing TM's fibre monopoly in the metropolitan areas of the Klang Valley, Penang and Johor, we estimate that the merged entity's DCF/share could reach RM5.00, based on a WACC of 7.4% and terminal growth rate of 2% post-FY25F, implying a potential upside of 28% and catalysing a re-rating on TM. This could lead to an even larger consolidation given that Khazanah Nasional is a substantial shareholder for Axiata, TM and Time.
• A key hurdle could be the regulator, the Malaysian Communications and Multimedia Commission’s (MCMC) refusal to grant approval for the consolidation in the fibre broadband market given its agenda to encourage more competition amongst the incumbents as part of its overall strategy to lower costs and deliver improved services. Hence, until such consolidation actually emerges, we maintain our NEUTRAL outlook on the sector given the unmitigated mobile competition amid escalating capex requirements against the backdrop of the National Fiberisation and Connectivity Plan (NFCP) agenda to improve national connectivity and affordability. For now, our only BUY is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses

Source: AmInvest Research - 11 Aug 2020