Our tactical strategy to favour fixed over wireless has served well. While we see positive development as telcos agree to take stakes in DNB, the details of the deal is pending as well as the finalization of the Reference Access Offer (RAO). Telcos’ dividend yields are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests. Maintain NEUTRAL and reiterate our preference in wired over wireless. Our top picks are TM (BUY, TP: RM7.23) and TdC (BUY, TP: RM5.37).

Lacklustre performance. KLTEL fell 13% in 1H22, underperformed KLCI’s 8% loss (see Figure #1) as the sector was plagued by 5G regulatory uncertainties and Prosperity Tax impact. Our tactical strategy to favour fixed over wireless had served well with both top picks (TM and TdC) experiencing smaller losses relative to the broader index.

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). While we see positive development as telcos agree to take stakes in DNB, the details of the deal is pending as well as the finalization of the Reference Access Offer (RAO).

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.

Yield play. In this hawkish environment, telcos’ dividend yields which average circa 4.0% (see Figure #6) are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests. Foreign shareholdings have been stagnant with more apparent sell-off observed in TM (see Figure #7).

Stronger greenback. HLIB expects USD to be firmer in 2022 averaging RM4.30/USD compared to 2021’s average of RM4.14/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: RM7.23) and TdC (BUY, TP: RM5.37). In view of the rate hike situation, we lower Maxis DCF-derived TP to RM3.19 (from RM3.96) after adjusting WACC from 6.1% to 7.1% (as we tweak risk-free rate and beta) and TG of 0.5%. Maintain HOLD. For the same reason, we also lower Axiata’s SOP derived TP from RM4.49 to RM2.81 (see Figure #9).

Source: Hong Leong Investment Bank Research - 20 Jul 2022