Investment Highlights

• Spectrum pricing for 2100MHz. Telecommunications operators Digi.Com, Maxis and Axiata’s wholly-owned Celcom Axiata have accepted the Malaysian Communications and Multimedia Commission’s (MCMC) offer to reissue its 2100MHz spectrum assignment at 2x15MHz band for a period of 16 years effective 2 April 2018, at the price component payment of RM118mil and annual fixed fee of RM50mil. The 2100MHz band is currently deployed for 3G services.

• Lump sum paid today. The price component will be paid in a lump sum before 1 February 2018 while the annual fixed fee payment is payable by 15 December throughout the assignment period. Digi, Maxis and Celcom have made the payments for the lump sum price component today.

• Price component may look cheap … The pricing of the 2100MHz translates to RM3.9mil for the price component vs. RM9.5mil/MHz for the 1800MHz band, RM21.8mil/MHz for the 900MHz and RM21.6mil/MHz for the 700MHz. Compared to the cellular coverage area of 1800Mhz which is 67% wider than 2100MHz, we view the price component as attractively priced for the telco operators.

• … but more than offset by pricier annual fee. The 2100MHz annual fee works out to RM1.7mil/MHz vs. RM0.8mil for 1800MHz, and RM1.9mil/MHz for both 700MHz and 900MHz. We would have expected the 2100MHz annual fee to be lower than the 1800MHz band, but this is partly mitigated by the lower lump sum component.

• Cheaper under 1800MHz pricing standard. If the price component and annual fees were to be based on 1800MHz, we estimate that the celcos would have saved RM249mil over the next 16 years, translating to RM16mil per annum.

• Still minor impact to earnings. Currently, the 2100MHz annual fee is RM50mil, similar to the new structure. Assuming higher depreciation and interest charges from the RM118mil lump sum payment, we estimate below 1% impact to the FY18F earnings of Axiata, Maxis and Digi.

• Even lower impact on gearing. Given the lower base impact of the 2100MHz price component, we estimate that the lump sum payment will not have any significance to Maxis’ net debt/EBITDA of 1.2x, Axiata’s 1.4x and Digi’s 0.7x.

• Next round of spectrum costs will be the 700MHz. Telcos have submitted their bids 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 long-term evolution (LTE) technology and beyond. 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

• No immediate impact to revenue accretion. The additional 700MHz 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 relaunched unifi mobile service should be benefit from a 700MHz block.

• No easing in mobile data pricing intensity. We expect further repackaging formulations by the industry against the backdrop of U Mobile’s Hero P78 plan, which offers unlimited data with speeds up to 5Mbps for RM78/month and P99 for unlimited data with no speed caps at RM99/month. In our view, near- to medium-term revenue growth outlook remains weak given the likelihood of further intensification in the mobile wars, with Digi and Celcom likely to raise the ante against both U Mobile’s plan and unifi mobile’s unlimited mobile data/voice/SMS pricing plans, currently priced at RM79/month for the first SIM, RM69/month-RM49/month for second to fourth SIM. As U Mobile and unifi mobile wrestle for new customers on the unlimited mobile data arena, we do not discount the possibility of sector earnings cuts if incumbents up the ante to further exacerbate the already intense competition for market share.

• Maintain NEUTRAL call given the continued intense competition in the cellular telecommunications segment while the fixed broadband segment could face rising pressure from the government to cut tariffs to drive a knowledge and IT-driven economy. Our Top BUYs remain Axiata and TM due to the game-changing merger prospect which will significantly enhance their earnings and market share trajectory while Maxis and Digi are HOLDs due to the resistance in gaining traction in revenue growth amid potential loss in competitive advantage under a re-energised Axiata-TM brand.

Source: AmInvest Research - 31 Jan 2018