Our tactical strategy had served well with stock calls relative outperformance. We laud the single neutral 5G initiative for efficiency gain and eliminate asset duplication. DNB’s 5G network (both SA and NSA) is expected to cover 80% population with circa 10k sites by 2025. As a pre-requisite for 5G deployment, fibre leasing is estimated to account for the bulk of RM7bn allocation in DNB’s tender. Maintain NEUTRAL and reiterate our preference in wired over wireless. Our top picks are TM (BUY, TP: RM7.93) and TdC (BUY, TP: RM16.88).

Outperformed and our picks stood out in 1H21. KLTEL gained 5% vs. KLCI’s 6% loss (see Figure #1) thanks to its resilience amid Covid-19 and supported by merger news. Our tactical strategy to favour fixed over wireless since the beginning of 2020 had served very well. Our stock calls did well with both BUY calls (TM and TdC) yielding decent relative returns (+12% and +6% YTD). They were top 2 and only gainers in the sector while others faltered. We stay the course for 2021 while we observe even more peers adopting the same positioning.

5G. We laud government’s move to establish DNB to rollout a single neutral 5G infra. In fact, we coined this concept 6 years too early for 2G network (refer to our report titled “2015 Outlook” dated 19 Jan 2015) for the same benefits of efficiency gain and eliminate asset duplication. After Huawei pulled out its standalone bid, Ericsson was awarded the 10-year contract worth RM11bn to deploy circa 10k sites along with a target to achieve 80% population coverage by 2025. The 5G network is expected to be both SA and NSA architectures on the same hardware on day 1 granting full compatibility to all 5G devices in the market. NSA will be running on the most sought after 700MHz as anchor band, taking advantage of its superior propagation feature (see Figure #2-5). Meanwhile, SA will be utilizing C-band (3.5MHz) as NR band.

Fibre is king. Its role as backhaul to transfer data at the speed of light has become ever more critical and a mandatory pre-requisite in broadband/5G builds. Demand will spike not only in terms of capacity, but also coverage in order to compensate for 5G spectra (especially mmW) shortcoming in propagation. Surge in wholesale bandwidth demand will boost margins even under MSAP regime. Also, new fibre rollouts are commercially negotiated (price not regulated) and fixed telcos will command more lucrative returns. Using MCMC’s site rental pricing as guidance, a back-of-the envelope calculation implies that fibre leasing will account for the bulk of RM7bn allocation in DNB’s tender and secured cash flow to fibre owners, especially TM.

Yield play. Despite this low rate environment, telcos’ dividend yields which average circa 2.2% (see Figure #6) are not attractive enough to spur domestic and foreign buying interests. Telcos’ foreign shareholdings have improved from their 2017-18 low levels with more apparent swings observed in TM and TdC (see Figure #7).

Weaker greenback. HLIB expects USD to be softer in 2021 averaging RM4.10/USD compared to 2020’s average of RM4.20/USD (see Figure #8). This may lead to lower IDD traffic costs and foreign debt financing. TdC’s global bandwidth sale and leasing proceeds will be lower as majority are dominated in USD.

Competition. Business as usual as Big-3 telcos remain disciplined and cost-focused. If Celcom and Digi amalgamation materializes, we expect healthier market rivalry with lesser price undercutting for market share gain. Pre-to-postpaid migration continues to be motivated by voice-to-date substitution.

Maintain NEUTRAL and reiterate our emphasis on fixed over mobile as they are the prime beneficiaries in broadband/5G infrastructure deployment. Our top picks are TM (BUY, TP: RM7.93) and TdC (BUY, TP: RM16.88).

Source: Hong Leong Investment Bank Research - 15 Jul 2021