Outperformed in 1H19 stimulated by market consolidation news flow and fruitful cost savings initiatives. Still enough 700MHz to go around and not likely to trigger any price aggression although less blocks are available. SST2.0 may haunt the cellcos again if instructed to absorb. Competition is BAU as players are cost-focused. Reiterate NEUTRAL pending clarity on the mega merger which may eventually lead to a healthier market. TIME is our top pick.

Outperformed in 1H19. Spurred by market consolidation news flow and fruitful cost savings initiatives, KLTEL gained 15% vs. KLCI’s 1% decline (Figure #1). Our stock call performance in 1H19 was a mixed bag, with some hits (Digi, TM and TIME) and misses (Axiata and Maxis).

Airwave. 700MHz is the most sought after in the upcoming tender thanks to its superior propagation feature which may result in operational efficiency (Figure #2-5). Based on MCMC’s latest public inquiry, the assignment and rollout are planned to be in 4Q19 and 3Q20, respectively. Instead of 8 blocks of 2×5MHz as per 2017’s tender, it may only be allocated in 4 blocks of 2×10MHz. However, we think there is still enough to go around and not likely to trigger any price aggression, assuming equal distribution among the Big-3 and U Mobile. While Telonor-Axiata merger is still uncertain, we think TM is comfortable with existing holdings, considering (1) small sub base (<0.5m); (2) already has low frequency spectrum (850MHz); and (3) existing domestic roaming agreement with Celcom. Assuming the Big-3 to obtain 1 block each based on the old pricing, our simulation suggests that gearing levels will remain comfortable while PAT impact to range 3-4%. 2.3GHz and 2.6GHz bands are also slated for re-allocation in 3Q19.

SST2.0. Cellcos may be instructed by the government to absorb domestic prepaid subs’ 6% levy. However, if the compensation is done in the form of freebies instead of cash outlay, we believe the negative impact will be more manageable. On the flip side, this may reduce the intensity of the competition in the market as telcos grapple to contain this new cost item.

Yield play. As global central banks turn dovish, telcos’ dividend yields which average circa 3% may become attractive enough to spur foreign buying interest (Figure #6). Telcos’ foreign shareholdings had been hovering at low levels in 2017-18 and some upticks are observed in recent months (Figure #7).

Stronger greenback. HLIB expects USD to be stronger in 2019 averaging RM4.05- 4.15/USD compared to 2018’s average of RM4.04/USD (Figure #8). This may lead to higher IDD traffic costs and foreign debt financing. TIME’s IRU sales proceeds will be higher as majority is dominated in USD.

Competition. Business as usual as Big-3 telcos remain discipline and cost-focused. Prepaid-to-postpaid migration continues to be motivated by voice-to-date substitution. Gradually, wireless to erode wired’s market share with WTTx solution leveraging on matured 4G and 5G in the future.

Maintain NEUTRAL pending clarity on the mega merger which may eventually lead to a healthier market with less rivals. Our top pick is TIME (BUY, TP: RM10.21). We also take this opportunity to raise TM’s DCF-derived TP to RM5.00 (from RM3.81) with WACC of 7.4% (previously 8.5%) and TG of 1% (previously 0.5%) as we believe that its recent cost structure improvement is sustainable as long as its mobility strategy remains friendly. Near term catalyst would be re-admission into KLCI index. Reiterate BUY. While we maintain HOLD on Axiata, we raise our SOP-derived TP to RM4.94 (from RM4.15) after adjusting Celcom, XL and digital’s valuations (Figure #9).

Source: Hong Leong Investment Bank Research - 29 Jul 2019