Our tactical strategy to favour fixed over wireless has served well. We stay the course for 2023 as the levy is one-off and 5G build-up will continue regardless of the political uncertainties. The impact of next MSAP price revision, if any, is expected to be mild and likely to be offset by ever increasing consumption. Telcos’ dividend yields are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests. With the amalgamation of Celcom and Digi, we expect healthier market rivalry with lesser price undercutting for market share gain. Maintain NEUTRAL and reiterate our preference in wired over wireless. Our top picks is TM (BUY, TP: RM6.94).

Lacklustre performance. KLTEL fell 8% in 2022, which underperformed KLCI’s 5% 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 (i) TdC was the only gainer (+7%); and (ii) TM experienced smallest loss (- 2%), among peers and relative to the broader index. We stay the course for 2023 as the levy is one-off and 5G build-up will continue regardless of the political climate.

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 4 telcos have taken equity stakes in DNB, we are sceptical of its benefits as 5G wholesale access is mandated to be fair and equal to all telcos. Except for Maxis, 5 telcos which had executed their access agreements with DNB have commenced retail 5G services to end users. However, the new government recently announced that it would relook at the 5G project as it was not formulated transparently as the single ownership of spectrum raised concerns from telcos over pricing, transparency and monopoly.

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 be 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. We are not overly concerned about the next MSAP price revision, if any. The impact is unlikely as severe as the previous’ “double the speed, half the price” objective and likely to be offset by ever increasing consumption.

Yield play. In this hawkish environment, telcos’ dividend yields which average circa 3% (see Figure #6) are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests. Cellcos’ foreign shareholdings have been flat with more apparent upticks observed in both TM and TdC (see Figure #7).

Weaker greenback. HLIB expects USD to be softer in 2023 averaging RM4.34/USD compared to 2022’s average of RM4.40/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. With the amalgamation of Celcom and Digi, 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 is TM with BUY call on the back of unchanged DCF-derived TP of RM6.94 (WACC of 8.0% and TG of 1.0%). We are particularly positive on its cost optimization measures which is now yielding an impactful outcome. Leveraging on its extensive fibre reach, TM is perceived to be the critical fundamental building block of government’s 5G rollout under MyDigital initiative. Furthermore, TM is well positioned as the sole Malaysian Cloud Service Provider when sovereignty is the utmost important in dealing with government’s data.

Source: Hong Leong Investment Bank Research - 6 Jan 2023