Investment Highlights

• Beauty contest begins for 700MHz band. As we have highlighted in past reports, the Malaysian Communications and Multimedia Commission (MCMC) has released its marketing plans for the 700MHz frequency band, which is currently being used for analogue television broadcasting and will be available for cellular telecommunications operators on 1 January 2019. This new spectrum will be used as coverage band for the deployment of high-speed mobile broadband services using longterm evolution (LTE) technology and beyond.

• 8 blocks up for tender. The MCMC will offer up to 8 blocks of 2 x 5MHz bands, ranging from 703MHz-743MHz and 758MHz- 798MHz, for a 15-year spectrum assignment to mobile operators. Each bid is limited to a maximum of 4 blocks to be submitted before 2 January 2018. The concessionaire has to pay the price component and annual fee, similar to the earlier assignments for the 900MHz and 1800MHz bands. For a 2 x 5Mhz block, the price component can be paid via 4 options i.e.: a) a single lump sum of RM215.5mil; b) 5 equal annual payments of RM52.1mil; c) 10 equal annual instalments of RM32.8mil; or d) 15 equal annual instalments of RM27.8mil. The annual fee of RM18.5mil has to be paid by 15 December each year.

• Reasonable pricing for the 700MHz. Based on the single lump sum scenario, the 700MHz price component works out to RM21.6mil/MHz, comparable to the RM21.8mil/MHz currently paid for the 900MHz bands. The 700MHz annual fee of RM1.9mil/MHz is also comparable to the 900MHz band. In our view, this is favourable to the telco sector given that the 700MHz band has over 40% wider coverage footprint compared to the 900MHz band.

• No immediate impact to revenue accretion. The additional frequency band can theoretically improve service coverage and connectivity while enabling carrier aggregation to facilitate LTE-advance penetration. However, the additional frequency band does not immediately translate into higher revenues, which will only materialise from higher paying subscriber market share as the service quality and speed improve compared with other players. Hence, even TM’s re-launched webe service should be benefit from a 700MHz block.

• Minimal earnings impact for FY19F onwards. Based on a 2 x 5MHz allocation which translates to an amortisation charge of RM14mil and annual fee of RM19mil, we estimate that the FY19F earnings reduction is the least for Maxis at 1.3%, Axiata at 1.6%, Digi at 1.8% and TM at 2.6%.

• Minimal balance sheet impact, except for Digi. Based on a 2 x 5MHz allocation for the lump sum payment, the FY18F net debt/EBITDA impact is minimal, remaining at 1.5x for Axiata, 1.2x for Maxis and 1.8x for TM. However, given Digi’s low debt levels, its FY18F net debt/EBITDA will rise from 0.6x to 0.7x, which is still comfortably within the group’s acceptable gearing.

• Upcoming spectrum reallocation for 2600MHz and 2100MHz. Following the 700MHz award, the next spectrum reallocations will be the 2600MHz and 2100MHz currently being used for 4G and 3G connectivity and expiring 31 December this year and April 2018 respectively. However, we believe that the pricing exercise for the upcoming band should have the similar minimal EPS and balance sheet impact expected from the earlier 1800MHz spectrum assignment, which cost only 44% of the price component and annual fee of the 700MHz band.

• Persistent pricing intensity. Competition in the mobile segment remains intense, as total subscribers has fallen by 3.9mil or 11% since 1Q2013, wholly due to the decline in the prepaid segment. In our view, near-to-medium-term earnings catalysts appear weak given the likelihood of further intensification in the celco wars with U Mobile’s unlimited data option at RM78/month plus free data roaming vs. webe’s RM79/month.

• Maintain NEUTRAL call given the continued intense competition in the celco segment with HOLD recommendations on Maxis and Digi. We have BUYs on Axiata and TM due to a game-changing re-merger likelihood which will significantly enhance their earnings and market share trajectory.

Source: AmInvest Research - 12 Oct 2017