Our tactical strategy had served well in 1H21 but 2H21 performance was impacted by Prosperity Tax. The ministry has reiterated its SWN ambition and the deployment will run as planned. In the event that there is more than one 5G network in the future, we think this might even benefit fixed players more due to diminishing bargaining power from any 5G access seeker. Maintain NEUTRAL and reiterate our preference in wired over wireless as we view this levy as one off. Our top picks are TM (BUY, TP: RM7.93) and TdC (BUY, TP: RM5.61).

Disappointing closure. KLTEL lost 3% in 2021, marginally better than KLCI’s 4% loss (see Figure #1) thanks to its resilience amid Covid-19 and supported by merger news. Our tactical strategy to favour fixed over wireless had served well in 1H21 with both to picks (TM and TdC) outperformed, but faltered in 2H21 which we attribute this to the negative surprise of Prosperity Tax. We stay the course for 2022 as we view this levy as one-off.

5G. We laud government’s move to establish DNB to rollout a single neutral 5G infra. Ericsson was awarded the 10-year contract worth RM11bn to deploy circa 10k sites along with a target to achieve 80% population coverage by 2024. The 5G network is expected to be both SA and NSA architectures on the same hardware granting full compatibility to all 5G devices in the market. The infra will be running on the most sought after 700MHz, as anchor band taking advantage of its superior propagation feature (see Figure #2-5), and C-band (3.5GHz). However, there were calls from the industry to allow an additional 5G network to run in parallel with DNB. This uncertainty was recently cleared as the government reiterated its single wholesale network (SWN) commitment and the deployment will run as planned.

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. In the event that there is more than one 5G network in the future, we think this might even benefit fixed players more due to diminishing bargaining power from any 5G access seeker with lower bandwidth demand, thus smaller bulk / volume discounts.

Yield play. In this hawkish environment, telcos’ dividend yields which average circa 2.6% (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 sell-off observed in TM and TdC (see Figure #7).

Stronger greenback. HLIB expects USD to be firmer in 2022 averaging RM4.16/USD compared to 2021’s average of RM4.15/USD (see Figure #8). This may lead to higher IDD traffic costs and foreign debt financing. TdC’s global bandwidth sale and leasing proceeds will be higher 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: RM5.61).

Source: Hong Leong Investment Bank Research - 10 Jan 2022