Market consolidation could reignite interest in Malaysia Telecoms, which have been ignored in recent years. Bloomberg previously reported that Maxis is exploring a U Mobile buyout, which can add value from potential synergies and healthier competition. Even if that does not materialise, we believe negatives that have dragged the sector have been priced in. The sector offers decent dividend yields of 4%, supported by a stabilisation of incumbent service revenues and continued cost cutting efforts. We maintain Neutral on Malaysia Telecoms, with Maxis as our top pick.

• Unloved for a long time. As things stands, the Bursa Malaysia Telecommunications & Mediaindex will report its fifth consecutive year of decline. However, trading at 1sd below its five-year average PE, we believe negatives have been priced in. The 5G saga has finally been concluded, with U Mobile being selected to implement the second network after a tender process. Fund managers are also Underweight the sector, with Telecoms forming only 3.9% of AUM (assets under management) vs. its 7.5% weight in the index.
• Potential rerating from market consolidation. We believe market consolidation could reignite interest in the sector. It was previously reported that Maxis is exploring a U Mobile buyout (see here). We believe a merger would make sense for both parties. U Mobile will potentially need a partner to rollout the second 5G network. For Maxis, benefits are potential synergies and healthier competition, being a form of market consolidation. This is akin to the announcement of the CelcomDigi merger on 8th April 2021, which led to the share price of Digi and Maxis rising 19% and 4% the day after its announcement. The main hurdles are likely to be pricing and regulation. However, if reports are true, the US$10bil figure is fair in our view, translating into a 2023 EV/Ebitda of 9.1x, which is in line with the industry average. Regulatory hurdles could prove to be more challenging, as a combined Maxis-U Mobile would have a 2023 subscriber market share of 46%, which would be deemed as dominant.
• Regaining defensive qualities? While once regarded as defensive, we argue that Malaysia Telecoms had lost that status in recent years, due to deteriorating earnings and regulatory uncertainties. Positively, service revenues have stabilised since 3Q21, driven by subscriber growth and postpaid market share gains. Top line stability and cost cutting efforts, should help sustain free cash flows, based on our forecasts. Forecasted dividend yields for the sector are decent at 4%. However, we still see limited upside to revenues, premised on mature penetration rates, competition and limited 5G use cases.
• Maxis is top pick for the sector. Changing coverage, we upgraded Maxis to a BUY at a new target price of RM4.25. We see value from a potential merger with U Mobile, which can lead to synergies and healthier competition. We maintain HOLD on CelcomDigi, as we believe cost savings have been well guided and risk now lies with execution. We downgraded TM to HOLD, due to increasing competition at unifi and price pressures at TM One. Lastly, we downgraded Axiata to Underweight, as we expect its HoldCo discount to widen.

Source: AmInvest Research - 18 Dec 2024