We maintain our NEUTRAL view for the telecommunication sector. We attended the launch of the industry performance report 2013 organised by the Malaysian Communications and Multimedia Commission (MCMC) yesterday and walked away with a neutral view. The authority believes the country is currently heading to the convergence era and urges Communications and Multimedia (C&M) players to collaborate and monetise through new business models under the digital future. The authority, meanwhile, also showed intention to re-farm the 900MHz and 1800MHz spectrums but no timeframe was revealed. In addition, the existing 700MHz frequency is expected to be allocated to telecom players for various usages upon the completion of analogue switch off. MCMC also urge telco players to raise capex moving forward to further expand their network coverage as well as capacity. There is no change in our FY14-FY15 earnings forecasts for all the sector players. TM (OP, TP: RM6.74) remains our top pick for the sector. Its near-term catalysts include: (i) more traction from HSBB2 project and (ii) potential better-than-expected synergies from its recent acquisition in P1. We continue to have a MARKET PERFORM rating on Maxis (TP: RM6.87), and Axiata (TP: RM6.92). For Digi (MP), its TP is maintained at RM5.53 but we see rooms to improve our earnings forecast in view of its superior performance against peers. Our small cap telco pick namely Redtone’s (MP) target price is maintained at RM0.77 but see rooms to raise the target price should the group manage to seal more data projects from the government.

Spectrum re-farming is underway. MCMC is planning to review the country’s 2G/3G spectrums to enhance the mobile service quality. While some of the 900MHz and 1800MHz spectrums are up for review (Figure 1 & 2), the authority has yet to decide on the options for the implementation (including auction, beauty contest allocation or both) as well as the timeframe. Beauty contest is an extension of a tender process. In a beauty contest, applicants for an assignment are assessed only on the basis of their experience and technical and commercial proposal. Celcom which owned 2x17MHz frequency, has the widest spectrum allocation under the 900MHz band followed by Maxis (2x16MHz) and Digi (2x2MHz) while the 1800MHz band was divided equally (2x25Mhz each) to the above-mentioned mobile operators. We understand that the revisions are to address the network congestion issue faced by the telcos as well as to narrow the gap between the big boys and smaller players. The spectrum re-farming is expected to enhance service quality and allow telcos to penetrate into other value-added services such as mobile TV. Meanwhile, the existing 700MHz band will be considered for various uses by telecommunications after re-farming of the spectrum following the completion of the analogue switch off in 2016.

Moving into convergence era. MCMC believes that the convergence era has finally arrived given the C&M industry’s ecosystem (Figure 3) has become more matured. In a converging environment where Internet Protocol based services allow more cross platform business orientations and services, there is renewing opportunities for the industry players as well as end-users. The authority is of the view that with the current improving infrastructure reach and 4G LTE roll-out coupled with the upcoming Digital Terrestrial Television Broadcasting services roll-out, the country’s C&M industry is expected to register RM57b revenue by 2020 from RM45b in 2013, where the telecommunication sector contributed nearly 85% of the revenue share while the balance came from broadcasting (11%), postal sector, and others. The growth opportunities moving forward include E-commerce, mobile wallet, big data, cloud computing and etc. (Figure 4).

Urge for higher capex spending. MCMC indicated that there is a need for the local mobile service providers to raise their capital expenditure to expand network coverage and capacity in view of the country’s mobile capital expenditure per capita was just above RM100 (vs. RM340 in United States, where service providers are spending more capital on network improvements and for upgrading their wireless infrastructure). The authority viewed such investments as important to further enhance the 4G LTE services offerings stated in 2013 as wireless broadband services take-up is increasing by the day. For the last five years, the focus was on getting people connected to a broadband service. The next potential growth area, MCMC believes, is to intensify information and communications technology (ICT) usage and in particular Internet services. Thus, service providers must ensure availability of a reliable and secure network service apart from satisfying consumer demand for affordable services.

Source: Kenanga