Investment Highlights

• We maintain NEUTRAL on the telecommunication sector. We are cautious due to: i) uncertainties on the second 5G business plan, which will be announced in 1H2024, ii) the lack of growth drivers, and iii) high operational costs relating to the development of the 5G network.
  
  Our top pick is Telekom Malaysia (BUY, FV: RM6.70). TM, the dominant network infrastructure provider with extensive fibre reach, is anticipated to benefit from the roll-out of 5G. Also, TM’s net profit growth is expected to be underpinned by accelerated demand for connectivity, services, digital solutions and cost optimisation initiatives. We may downgrade the sector to Underweight if consumer sentiment turns negative on inflationary and recessionary fears.
   
• Marginal increase in number of net subscribers. Key mobile network operators (MNOs) recorded marginal celullar net subscriber gains with CelcomDigi up by 3% YoY to 20.6mil and Maxis up by 2% YoY to 12.1mil in 9M2023. On a QoQ basis, net subscribers for CelcomDigi by a smaller 1% and Maxis by 2% in 3Q2023. CelcomDigi's net increase in subscribers can be attributed to family bundle packages, which offer lower prices compared to the principal line. Meanwhile, Maxis’ improvement was driven by a recovery in prepaid subscribers following the launch of a new package. Maxis' postpaid subscribers improved in 9M2023, supported by fixed-mobile convergence and device-bundled postpaid products.
   
• Ambiguity on the second 5G rollout. 5 telcos i.e., CelcomDigi, Maxis, TM, U Mobile and YTL Power International executed share subscription agreements (SSA) on 1 Dec 2023, to acquire shares in Digital Nasional (DNB), the owner of the first 5G wholesale network. To date, DNB has achieved 80.2% 5G population coverage, surpassing the 80% target. Therefore, there will be a meeting between MCMC, DNB and 5 telcos tomorrow to decide on the road map towards a dual 5G network model. Upon completion of SSAs, MOF can exercise a put option for each telco to purchase RM100mil in DNB shares (implying a 6% equity stake) and assume RM90mil of MOF’s advances, together with a RM233mil prepayment for 5G wholesale connectivity. All in, the initial cash outlay for each telco will be equal at RM423mil. The 5 telcos will eventually end up with an equity take of 14% each in DNB, with MOF owning the balance 30% stake. We expect the SSAs to be completed in 1H2024 upon successful due diligence and on agreed terms. However, the specific timeframe for MNOs to discuss their involvement either in operating the dual network business or constructing the second 5G network lacks clarity at this stage. In addition, details on the business plan have not been revealed for the second network. Currently, the adoption rate for 5G is still low at 10.8%.

• No imposition of 5G access fee. Communications Minister Fahmi Fadzil reaffirmed that telecommunication companies will not impose additional charges for subscribers to access the 5G network. CelcomDigi initially charged a fee up to RM20/month for 1-2 months during the initial rollout last year while Maxis, a latecomer, did not impose any charges. For certain offerings such as lower-tier postpaid plans and prepaid plans, customers receive access to 5G when they purchase extra data add-ons. However, those data add-ons or Internet passes may have speed caps even though connected to the 5G network. All in, this does not have any impact on our forecasts for the stocks under our coverage as we did not assume any 5G fees.

• Jendela 2 will drive demand. Jendela Phase 1 concluded in December 2022, surpassing its targets. The targets included connecting 7.7mil premises with fibre, achieving 96.92% 4G population coverage and maintaining an average mobile network speed exceeding 116 Mbps.
  
  In Phase 2, the key emphasis is on expanding internet coverage for 5G and introducing technologies such as satellite technology to ensure high speed and enhanced reliability. The goals are to achieve 100% internet coverage, deliver mobile broadband speed of 100 Mbps and surpass 9mil premises with gigabit speed (up from 7.5mil achieved in JENDELA 1). The plan is geared towards extending internet coverage to public institutions of higher learning, army camps and expressways. A key challenge for Jendela 2 stems from the length of time to build towers due to security concerns, geographical factors, unidentified landowners and limited basic infrastructure in rural areas.

• CelcomDigi (HOLD, FV: RM4.80) is our top choice for ESG. CelcomDigi won The Edge Malaysia ESG Awards 2023 in the telecommunication and media sectors. The company has maintained its 4-star FTE4Good Bursa Malaysia rating by focusing on various ESG issues ranging from digital inclusion, privacy, data protection, human rights, health, safety and climate action.

Source: AmInvest Research - 11 Jan 2024