Investment Highlights

• Phase 1 on track. We attended the Malaysia Communications and Multimedia Commission’s (MCMC) 2nd Quarterly Report on the National Digital Infrastructure Plan (Jendela) yesterday, presented by its chairman Dr Fadhlullah Suhaimi Abdul Malek. Jendela’s phase 1 progress is currently on track to reach its national target to fiberise 7.5mil premises, achieve mobile broadband speed of 35Mbps and 4G coverage of 96.9% by the end of 2022.

QoQ, fiberised premises increased by 5% QoQ to 5.7mil, 4G coverage rose 1.5 percentage points to 93.5% while mobile broadband speeds slid slightly by 0.6% to 25.4Mbps in 1Q2021 (Exhibit 2). During the quarter, fixed broadband premises increased by 293K, surpassing the MCMC’s target by 32% while new mobile sites rose by 29 (vs. a target of 25) and upgraded sites by 3,278 (+1.7%). With 629K 3G customers migrating to 4G and 20K carriers switched off in 1Q2021, the MCMC has ceased the certification and importation of 3G and 4G equipment without VoLTE from 1 January 2021.

• Engaging with states to reduce tower permit costs. The MCMC revealed that state permits for tower deployment in Malaysia currently has a 6-year median cost of RM42K/site with the most expensive in Johor (RM117K) followed by Melaka (RM105K) and Sarawak (RM65K) (Exhibit 4). As such, the MCMC plans to engage with the states to reduce permit costs, which are different across the states, and speed up 4G coverage expansion.

Recall that Jendela aims to improve 4G connectivity for all Malaysians and prepare the nation for a steady transition to 5G technology under the 12th Malaysia Plan (2021–2025), which will be implemented over 2 phases (Exhibit 3). The recent tender, potentially worth RM4.6bil, to construct 1,661 new sites across the country for 4G expansion has closed on 31 March 2021 with the results expected to be announced by the end of 2Q2021.

• Transitioning to 5G. Under phase 1, the sector will upgrade 12,499 2G/3G base stations to 4G, retire the 3G network and migrate the spectrum for 4G usage while fiberising 1.2mil additional premises by the end of 2021. This lays down the foundation for 5G, driven by the wholly government-owned special purpose vehicle Digital Nasional, which will own, execute and manage 5G spectrum together with the infrastructure that is expected to cost RM15bil. This is envisaged to allow licensed telcos with equal access to the infrastructure at transparent wholesale prices, facilitating an expedited rollout of 5G services nationwide, expected to begin in stages by the end of this year.

As 5G investments are expected to cost 25%–75% more than 4G infrastructure, this structure aims to eliminate duplication of resources and allow operators to compete on service quality as opposed to facilities-based differentiation. The MCMC refrained from commenting on Digital Nasional’s funding structure, which is expected to be from the private sector.

• Celco collaboration. Recently, the 3 largest cellular operators (celcos) in the country, Axiata Group’s wholly-owned Celcom, Digi.Com and Maxis, have agreed to jointly develop and share fibre infrastructure which will facilitate faster and more efficient backhaul deployment to their base stations as well as avoid duplication. The collaboration could still mean a single-hop system by complementing fibre technology with microwave, which allows faster deployment.

Even so, fibre infrastructure upgrades will accommodate accelerating internet traffic growth, especially in high-impact areas, extending 4G mobile backhaul to eventually support 5G new sites and fibre-to-home services. Hence, over the longer term, the operators could potentially deploy fibre broadband service directly to consumers, bypassing TM’s High-Speed Broadband and Sub-Urban Broadband networks.

• Differentiating to monetise 5G. As Maxis has shown its successful drive to differentiate through superior network quality, customer care and convergence strategy by bundling with fibre solutions, competitors have also begun similar marketing campaigns. Recently, Celcom introduced its Max bundled package with fibre speeds staring at 100Mbps for postpaid mobile plans starting from RM80/month.

Increasingly, operators agree that ongoing intense competition globally will obviate any attempt to charge premium prices for 5G branding unless the provision of managed services and attractive solutions are offered to customers. As such, we believe that 5G marketing campaigns are likely to follow the earlier 4G models in offering unlimited data limited by speed caps that will depend on the evolution of the ecosystem involving the innovation of new applications, devices and content.

• Consolidation possibilities still on. Notwithstanding efforts to reduce capex deployment by the regulator and amongst operators, we still expect declining data yields amid intense competition from among themselves, further exacerbated by U Mobile, unifi Mobile and MVNOs, to drive operators to seek consolidation for greater cost optimisation, economies of scale and reduce rivalry. Even though the MCMC has shown a preference for maintaining competitive pressures to reduce broadband prices for consumers, we maintain our view that the industry’s stagnant revenue trajectory could eventually drive the sector towards more merger and acquisition activities.

• Maintain OVERWEIGHT with BUY calls for TM, which has shown significant cost improvements together with more compelling dividend yields, and Axiata, which offers bargain EV/EBITDA valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies. These valuations are even more compelling given their ESG scoring of 3–4-stars. Our HOLDs are maintained for Maxis and Digi given the sector’s intense competition which has constrained revenue and margin growth prospects.

Source: AmInvest Research - 8 Apr 2021