Highlights

GSMA has urged regulators worldwide to cease collecting for USF and to re-evaluate their approach based on a report which revealed that current funds are sitting on a combined USD11bn in unallocated cash.

Interestingly, Malaysia is ranked number 5 in world’s top five USFs’ fund balance when expressed as dollar per rural population. This implies that Malaysia’s USF is piling up while there are relatively minimal underserved areas and groups left to be invested in.

By end of 2012, Malaysia’s USF is estimated to amount to USD601.8m or RM1.835bn.

Comments

This report would create some pressure on Malaysian government and / or MCMC to clarify the situation and provide some guidance on future usage of the USF.

However, we think that they would not face any challenges in defense as the proceeds are still being utilized to improve communication services.

As this policy has been dated since 1998 with latest minor amendment in 2008, perhaps the policy should be reviewed methodically and more frequently as well as taking the alternatives suggested by GSMA into consideration.

Telcos would not have the bargaining power to negotiate in their favor. Additionally, regulators may argue that telcos are already operating with free airwave license instead of the need to bear the exceptionally high cost if the licenses are being awarded through open tender.

Currently, all telcos are subject to contribute 6% of their annual net revenue to USF. If USF were to be abolished, there will be an immediate EBITDA margin expansion and boosting their capability to distribute more dividend payout. As such, the sector may qualify for rerating if MCMC abolish/reduce USP fund contribution.

However, until more development and information or abolishment/reduction in USP fund contribution, we remain status quo with our NEUTRAL view on the sector while keeping our stocks ratings and target prices unchanged.

Catalysts

• Cost savings from partnerships.
• Managed services / outsourcing.
• Increased demand for wholesale bandwidth.

Risks

Irrational competition, regulation of tariffs, FOREX.

Forecasts

Unchanged.

Rating

Neutral

• Positives – Low beta, defensive, strong cash-generation and dividends should underpin the share price.
• Negatives – Potential irrational competition, regulatory risks, unable to monetize data, dumb pipes.

Top Picks

• Maxis (BUY, TP: RM7.29).
• TdC (BUY, TP: RM4.60).

Source: Hong Leong Investment Bank Research - 12 Apr 2013