KUALA LUMPUR (July 13): Kenanga Research has maintained its “overweight” call on the telecommunication sector, as it views that the players are still trading at a steep discount to their historical average.

In a note on Thursday (July 13), it said despite the significant outperformance in 1HCY2023, valuations of key players are still noticeably below levels before the selloff triggered by the introduction of the Single Wholesale Network (SWN) model for the 5G roll-out in Malaysia in late 2021.

“We see room for upwards valuation re-rating, as the plan for a second 5G network firms up under the new market-driven dual network model.

“Also, backed by the break-neck speed of technological advancement in telecommunications resulting in faster speed and wider coverage but at a cheaper cost, the demand for broadband Internet and mobile communications will continue to rise, regardless of economic cycles,” said Kenanga.

Kenanga said despite their strong share price performance year-to-date, most telcos under its coverage universe are still trading at a steep discount to their historical average EV/Ebitda (enterprise value to earnings before interest, taxes, depreciation, and amortisation ratio).

CelcomDigi Bhd (CDB) and Maxis Bhd currently trade at 10 to 11 times forward EV/Ebitda, versus 12 to 15 times historically.

Similarly, Telekom Malaysia Bhd (“outperform”; TP: RM6.23) currently trades at four- to five times forward EV/Ebitda, versus six- to eight times historically.

Its sector top picks remain CDB (“outperform”; TP: RM5.15) and Maxis (“outperform”; TP: RM5.30).

Kenanga said CDB is the leading mobile market company with a 42% market share. It combines Celcom’s extensive network, DIGI’s urban niche, competitive pricing, and appealing bundling to attract customers. CDB also boasts Ebitda margins on DIGI and Celcom of 48%, above the industry average of 44%. Introducing 5G will benefit subscribers, especially due to Maxis’ current absence in this field.

It said Maxis is regarded favourably due to its strong branding and customer loyalty, particularly in the premium market. It also stands to gain from potentially lower 5G access costs.

It also benefits from a resilient demand for its services and outpaces competitors in terms of new 4G tower installations, premises fiberisation, and tower upgrades that will enhance its B2B (business-to-business) revenue from corporate and small-medium enterprises.