We move the telco sector to Neutral (from Underweight) and upgrade Digi, Maxis and TM to HOLD (from SELL) with higher TPs but unchanged earnings forecasts. Businesswise, 1H20 is a very challenging period – all telcos reported lower 1Q20 earnings and are expecting an even weaker 2Q20 due to MCO/CMCO and lockdowns in other countries. A confluence of other factors (ie, ample liquidity, BNM’s OPR cuts and strong investor demand for defensive quality stocks) have supported the telcos’ valuations. Thus, we believe the telcos’ share prices are unlikely to revisit the previous lows. We raise our valuation multiples and TPs for the telcos under our coverage, prompting us to upgrade the sector to Neutral (from Underweight).

1Q20 Was a Weak Quarter…

In 1Q20, Celcom reported the steepest decline in subs (-10.8% yoy) but managed to sustain its postpaid ARPU (yoy). On the contrary, Maxis grew its cellular subs by 4.0% yoy driven by growth in postpaid subs at the expense of a lower postpaid ARPU of RM81/month (from RM88/month in 1Q19). All in, the three cellcos (Celcom, Digi and Maxis) had all reported lower service revenues (qoq and yoy) due to lower MTR, lower roaming revenues and reduced usage from the budget-conscious and foreignworker segments. Tracking the lower service revenue, all telcos (including TM) reported weak 1Q20 earnings.

… and Earnings May Soften Further in 2Q20

The 2Q20 earnings outlook is dimmer as the free data of 1GB/day during the MCO/CMCO period should weaken the prepaid APRUs while the lockdowns in other countries may result in lower sales of prepaid/new SIM cards (for Axiata). For TM, we expect the weak business sentiment, prudent government spending and competition from Maxis to affect the revenue from its enterprise segment.

Lower Funding Costs and Ample Liquidity Support Valuations

Elsewhere, BNM had on 5th May 2020 cut the OPR by a steeper than expected 50bps. The OPR cut, along with compression in global government bond yields have pushed 10-year MGS yield to 2.84%, near its historical low of 2.77% recorded on 5th May. A confluence of factors (ie. BNM’s OPR cuts, 6-month payment deferments for all loans and government stimulus packages) have led to an increase in market liquidity and re-rated equity prices.

Upgrade Stock Ratings and Sector Call to Neutral (from Underweight)

Notwithstanding the sector’s weak 2020E earnings outlook, we expect the ample market liquidity, lower funding cost and strong investor demand for well-managed companies to support telco valuations. As such, we maintain our earnings forecasts but revisit our valuation metrics and lower our WACC assumptions (or increase the earnings multiples) for the telcos.

We upgrade TM (TP RM4.60), Maxis (TP RM5.65), and Digi (TP RM4.60) to HOLD (from SELL) with higher target prices while

reaffirming our SELL call on Axiata (with a higher TP of RM3.40) for its rich valuation, challenging business outlook and the high policy/market risks for its overseas operations. In tandem, we are upgrading the telco sector to Neutral (from Underweight). For exposure, Maxis is our relative preference for its superior network infrastructure, positive 2021-22E earnings outlook, and first-mover advantage in developing converged solutions for individuals, homes and businesses.

Source: Affin Hwang Research - 4 Jun 2020