KUALA LUMPUR (May 18): CGS-CIMB Research believes that greater clarity on the country’s 5G rollout plans will allow the telecommunications sector to better gauge its future capital expenditure and cost profiles, picking Telekom Malaysia Bhd (TM) as their top-pick with a changed target price (TP) of RM6.80.

In early May, Malaysia’s Ministry of Communications and Multimedia announced that it would allow a second 5G network to provide services once the owner of the first network — Digital National Bhd — hits 80% population coverage, essentially pushing Malaysia to a dual wholesale network (DWN) model.

CGS-CIMB in their report on Thursday (May 18) warned that uncertainties, including ownership and cost structures surrounding this matter and the failure to finalise 5G plans will weigh on valuations of telco stocks.

“And that the removal of DNB as a direct competitor to MNOs (mobile network operators) would leave overall cashflows largely unchanged in the long run,” it said, adding that clearing uncertainties can support better valuations.

The research house is transitioning from Discounted Cash Flow (DCF)-derived target prices for the Malaysian telcos to 12 months forward adjusted EV (enterprise value)/Ebitda (earnings before interest, taxes, depreciation and amortisation) valuations, as it deemed that the former has been less accurate in determining shorter-term valuations.

CGS-CIMB chose TM as their top overall pick with an “add” call and TP of RM6.80 (previously RM7.30) based on a 5.7 times adjusted FY2024 EV/Ebitda multiple reflecting a +1 standard deviation from its post-2017 adjusted EV/Ebitda range.

CGS-CIMB said TM’s current share price is likely priced at a greater drop in wholesale prices similar to the 2018 rate cut.

“As this clears up, we see room for a re-rating over a 12-month period,” the research house said.

“[We] believe it will take more than 12 months for the market to fully price-in a more rational regulatory environment,” CGS-CIMB commented on the cut in TM’s prices and drop in their FY2018 core net profits following regulatory changes.

It said a more muted 9% reduction in wholesale prices effective March 2023 versus an estimated 66% in 2018, should remove market concerns over TM’s earnings and drive a re-rating of its undemanding 4.9 times adjusted FY2023 EV/Ebitda valuation versus listed mobile network operators (MNOs)’ of over 10 times.

CGS-CIMB added that its FY2023/FY2024/FY2025 forecast for TM’s core net profits are at 108%/119%/140% of Bloomberg consensus respectively.

The research firm chose CelcomDiGi Bhd (CDB) as their preferred pick in the mobile space, with an upgraded call to “add” from “hold”, and a TP of RM5.00 (previously RM4.15) based on 11.6 times adjusted FY2024F EV/Ebitda multiple.

The revised TP reflects the trough valuations of DiGi prior to the announcement of its merger with Celcom in 2021, it explained.

“The previous troughs present a sensible target, as the earnings benefits of this merger begin to show through, with expectations to see early stages of reaps in 2H2023F, with more visible earnings uplift coming in 2H2024F,” it said.

“We see the merger between DiGi and Celcom in December 2022 providing significant earnings upside and acting as a re-rating catalyst” it added.

CGS CIMB said higher free-cash-flow yields (of over 5% in FY2023F-FY2024F) will support steady dividend yields, despite elevated capital expenditure from 5G investments and merger costs weighing on earnings in FY2023 and FY2024.

On the other hand, the house retained a “hold” rating on Maxis Bhd, with a revised TP of RM4.60 (previously RM4.00) based on -1 s.d. of its 10.8 times adjusted FY2024F EV/Ebitda multiple.

Maxis’s 11.8% share price rally since end-February 2023 has already reflected the improved regulatory environment facing MNOs, with 5G moving to a DWN structure, according to CSG-CIMB.

“We think Maxis’s healthy dividends [of 4.6 dividend yield] will provide some support, although upside potential could be limited in the absence of any significant catalysts to lift earnings and cashflows to new levels,” the research house further elaborated.

Lastly, it kept its “hold” call on Axiata Group Bhd with a revised TP of RM2.90 (previously RM3.20), based on a 5.7 times adjusted FY2024F EV/Ebitda which is -1 s.d. of its adjusted EV/Ebitda range post the Ncell-acquisition.

CGS-CIMB believes that Axiata needs a monetisation of its assets to drive a re-rating of its shares, which trade at 44% to end-FY2024F revalued net asset value (RNAV). CSG-CIMB estimates Axiata’s end-FY2024F RNAV to be RM5.56.

However, the research house added that Axiata’s share price has consistently come in below Bloomberg consensus TPs that are widely based on RNAV-based methodologies, “suggesting to us that unless there is a concerted effort to realise and return the values back to shareholders, RNAV may be pointless in predicting shorter-term TPs for Axiata,” it added.

CGS CIMB said efforts to sell stakes in their unlisted assets, e.g. edotco, are unlikely to generate significant re-rating catalysts, unless channeled back to shareholders.

“Merger-related expenses at CelcomDiGi will weigh on earnings in FY2023-FY2024, but healthy dividends from the merged entity will allow Axiata to sustain a 10 sen DPS (dividends per share) over FY2023-FY2025F,” mentioned the research house.