Highlights

• Yesterday, MCMC issued an invitation for public comment on 700MHz spectrum reallocation after broadcasting analogue switch off (ASO).

• Total of 2x40MHz bandwidth is available where 703-743MHz for uplink and 758-798MHz for downlink to be repurposed for LTE and beyond. Split into 8 blocks of 2x5MHz with limit of 4 blocks per applicant.

• Assign via tender yet through the process of beauty contest based on pre-defined criteria and 5-year business plan.

• Fee components per block (2x5MHz) starting 1 Jan 2019 for 15 years: 1. Price: RM215.5m (one lump sum) with options to break into equal annual payments over 5, 10 or 15 years. 2. Annual fee for maintenance: RM18.5m.

• Invitation to participate will be issued on 31 Oct 2016 and the closing date for submission will be on 2 Jan 2018.

• Assignment holders are prohibited to trade or transfer the spectrum in whole or in part to a third party.

• The regulator is also exploring the best method to implement the reload with ID mechanism. When ready, prepaid sub must provide partial ID for reload in order to curb misuse.

Comments

• The reallocation exercise is a positive development for the industry as the pricing structure is pro-business as expected (refer to our report entitled “2017 Outlook” dated 9 Jan). The costs are lower-than-expected vis-à-vis per 900MHz block for RM218.3m charge and RM18.8m annual fee.

• No update on the sub-2GHz bands (2.1/2.3/2.6GHz) expiring 2017-18 but this solidifies our earlier belief that pricing will be benchmarked against 1800MHz’s RM95.1m per block.

• While we concur the enhanced reload safety, this will undeniably pose challenges to telcos in terms additional cost and may curb spending due to the inconvenience.

Catalysts

• Cost savings from partnerships.

• Managed services/outsourcing.

• Increased demand for wholesale bandwidth.

Risks

• Irrational competition, regulation of tariffs, FOREX.

Forecasts

• Unchanged pending further guidance from companies.

Rating

NEUTRAL ( ↔ )

• Maintain NEUTRAL on the sector due to the lack of positive catalyst in the near term. However, telco remains stable supported by resilient domestic demand. Their dependable dividend yield will be a plus point in a volatile market.

Top Picks

• TdC (HOLD, TP: RM9.98) – (1) Retail is gaining momentum on the back of reach expansion and undisputable high value products; (2) data centre’s steady expansion; and (3) strong growth trajectory underpinning its ASEAN ambition

Source: Hong Leong Investment Bank Research - 12 Oct 2017