Highlights

• Bloomberg reported that Telenor is reviewing options for its 49%-owned DiGi. The Oslo-based parent may explore a JV with Asian carriers or a sale of its holding if it doesn’t find the right partner.

• Separately, it was also reported that Saudi Telecom (STC) is exploring to dispose its 25% stake in Binariang GSM which controls Maxis with 65% ownership. Binariang also owns India’s Aircel which is currently under investigation and in the midst of merging with Reliance Communications.

Comments

• News on Telenor came as a surprise as only widely known its desire to dispose its stake in Vimpelcom and possible exit from India market.

• Asia markets have always been regarded as the main driver of Telenor’s growth. Its presence in Malaysia is perceived to be synergistic to its other Asia footprints, including Thailand, Myanmar, Pakistan, Bangladesh and India.

• From the recent spectrum reallocation, Telenor was quoted to be satisfied after gaining access to low frequency band via the award of 2x5MHz on the 900MHz band.

• There is no immediate need for cash and Telenor has a solid balance sheet with net debt/EBITDA of 1.33x as of end of 2Q16, still a lot of room from self-imposed limit of 2.0x.

• Telenor’s other investments in Malaysia such as mudah.my and Prabhu Money Transfer are complementary to DiGi and this exhibits its long term investment commitment in DiGi.

• At this juncture, we still like DiGi judging it purely based on its current fundamentals. However, in the event that this speculation materializes, the new JV partner or buyer’s reputation may alter our opinion.

• On the other hand, STC’s withdrawal should not impact Maxis as it does not play any active management role but only board representation.

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

• Unchanged.

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.

Top pick

• DiGi (BUY, TP: RM5.78) – Under-leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Source: Hong Leong Investment Bank Research - 23 Sep 2016