Highlights

• Revised budget: to optimize revenue from telco spectrum through redistribution and bidding process.

• Celcom has offered 2/3G domestic roaming (DR) service to P1 in return of its infrastructure collaboration with TM.

• Robi to merge with Airtel Bangladesh to be satisfied fully via issuance of new shares with Axiata owning 68.7% of the merged entity. Comments

• Spectrum tender was not a surprise (refer to our report titled “2016 Outlook” dated 7 January) although this came earlier than expected as oil price plunged drastically, putting great pressure for government to meet budget deficit target.

• 900MHz (2/3G) and 1800MHz (2/4G) spectra are expired and believed to be targets for monetization. 2.1GHz (3G) and 2.6GHz (4G) will be expired in 2018 and 2017, respectively.

• As assumption, we are forecasting each block of 2x10MHz on 900MHz band to cost RM1.5bn for a license period of 10 years, based on the only historical 2.1GHz transaction fee of RM700m from TdC to DiGi.Com. The slightly more than 2x premium is justified due to the superior characteristic of the low frequency band.

• On the bright side, this would reinforce our earlier thesis that market rivalry will be rational given the uncertainties ahead. Also, this may lead to lower USP contributions (6% of sales), partly to cushion the auction impact.

• A win-win deal for Axiata and TM. While DR earnings boost may be limited at the beginning, Celcom gained wider fibre access for 4G backhaul.

• Optimistic on the in-country consolidation which may lead to healthier competition, cost savings and greater efficiency.

Catalysts

• Cost savings from partnerships.

• Managed services / outsourcing.

• Increased demand for wholesale bandwidth.

Risks

• Price war, irrational airwave tender, new entrant, FOREX, and tariff regulation.

Forecasts

• With that assumption, all 3 cellcos’ FY16-17 EPS are revised downward by 7.6% - 18.9%.

Rating

NEUTRAL

Positives

• Low beta, defensive, strong cash-generation and dividends should underpin share prices.

Negatives

• Potential irrational competition, regulatory risks, unable to monetize data and dumb pipes. Stock Calls
• DiGi (BUY, TP: RM5.78) – Under-leveraged balance sheet could support spectrum auction with steady dividend payout, low frequency band would enhance its efficiency.
• Axiata (HOLD, TP:6.09) and Maxis (HOLD, TP: RM6.40) are perceived to be the losers due to their prized 900MHz holdings and cautious on their ability to bid for spectrum while maintaining dividend distribution, in view of their elevated gearing conditions.

Source: Hong Leong Investment Bank Research - 29 Jan 2016