Highlights

• Sector’s 2017 performance was satisfactory, with an average return of 9.0% vs. FBM KLCI’s 9.5% supported by healthy competition. Our top pick TdC was the best performer.

• Spectrum: 700MHz tender is pro-business and will enhance operational efficiency thanks to superior propagation feature. We expect the Big-3 to obtain two blocks each while TM and U Mobile with one each. Post simulation, gearing levels remain comfortable while FY19F PAT impacts are projected to range 3.0-4.1%. Mixed updates on above-2GHz spectra but do not expect exorbitant fees if auction is called.

• Access pricing: Voice’s MTR and FTR were drastically cut in 2018-20 which may lead to 1-5% earnings impact but will be cushioned by voice to data substitution. However, this will lift tier-2 cellcos’ competitiveness. HSBB finally got regulated with substantial discounts in 2019-20. Cellcos to benefit in terms of savings in wholesale transmission backhaul charges at the expense of TM.

• Net Neutrality: Positive, a balancing act between telcos and OTT with possibility of new source of income. Still far-fetched to have definite conclusion but will be closely monitored.

• Local demand: Budget 2018 freebies to raise disposable income, spurring private consumption but we do not expect to benefit telcos due to data monetization challenges.

• Yield play: Expect one-off normalization to narrow the gap between OPR and dividend yields. Foreign shareholding to stay low as US Fed remains hawkish, dampening interest.

• Stronger RM: Average of RM4.10/US$ will lead to savings in IDD traffic costs and lower foreign debt financing. TdC IRU sales proceeds will be lower as majority is dominated in US$.

• Competition: Telcos to remain discipline and cost-focused. Gradually, wireless to erode wired’s market share with WTTx solution leveraging on matured 4G and 5G in the future. A new breed, Broadnet may spell bad news to TM’s monopoly. Satellite providers may also be a serious threat when HTS becomes available.

Catalysts

• Cost savings from partnerships.

• Managed services/outsourcing.

• Increased demand for wholesale bandwidth.

Risks

• Irrational competition, regulation of tariffs, FOREX.

Forecasts

• Unchanged.

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

• DiGi (HOLD, TP: RM4.50) – (1) Highest dividend yielder; (2) Low frequency band to improve efficiency; (3) Shariah re inclusion; (4) Strong balance sheet to support spectrum fee; and (5) Prudent management.

Source: Hong Leong Investment Bank Research - 10 Jan 2018