We reiterated our NEUTRAL call on the telecommunication sector. The upcoming spectrum refarming exercise is not expected to have any severe earnings impact to the big cap telcos, although we believe smaller incumbents may tend to benefit the most. Competition in the mobile segment is expected to be intensified further from the 2H15 onwards, followed the completion of U Mobile’s aggressive network expansion plan and clearer direction from TM’s mobility plans. U Mobile continues to make no secret of eyeing a listing on the Bursa Malaysia. Despite the roadmap remaining vague at this juncture, we projected that the group’s market capitalisation could be potentially worth up to RM861m – RM18.5b range (based on the book value and mobile subscriber’s market share methodology). There is no change to our earnings estimate for all the telcos under our coverage. We continue to like Digi (OP, TP: RM6.87) for its higher operational efficiency and better competency in monetising data. We reiterated our MARKET PERFORM rating on Telekom Malaysia (TM) but raised its target price to RM7.50 (from RM7.05 previously) after upgrading our targeted FY15 EV/forward EBITDA to 8.1x (+2.0 standard deviation above its 4-year mean) due to the potential traction gained from the HSBB 2 project. We maintained our MARKET PERFORM ratings on both Axiata (TP: RM6.82), and Maxis (TP: RM7.16) and keep the ACCEPT OFFER call on Redtone (TP: RM0.80) albeit we believe the long-term shareholders should hold the shares and wait for the catalysts to emerge.

Spectrum re-farming exercise – a key event to watch out. Our recent check with the industry players suggested that MCMC is now taking on a more active approach in reviewing the country’s lower-end 2G/3G spectrum (i.e. 900MHz band). Meanwhile, we also understand that industry players intend to urge the regulator to re-farm the 700MHz band (which is currently utilised for TV broadcasting) when the re-farming exercise takes place. While the exercise could potentially lower the allocation for the big cap telcos, impact on earnings is expected to be minimal. Potential beneficiaries for these spectrums under the re-farming exercise will be Digi, U Mobile and some other smaller players given their relatively lesser spectrum in those frequencies.

Escalating competition in the mobile segment. Following the aggressive network expansion plan launched by U Mobile and TM’s mobility plans (via P1), the competition in the mobile segment is expected to intensify further from the 2H15 onwards. While the competition remains calm for now, we do not discount that the late comers could potentially use aggressive pricing strategy to gain market share. The battle, however, is not expected to trigger a price war given that the top three Cellcos are still targeting to maintain their absolute EBITDA or sustain their margins (at previous financial year) in FY15.

U Mobile – an upcoming newbie in the Bursa Malaysia? Despite U Mobile not having a definite answer as to when the telecommunication services provider will float its shares, market has persistently speculated it will seek for public funding following the announcement of an aggressive RM1.5b network expansion plans for the year 2015. While the listing roadmap is still very much vague at this juncture, we estimate that the group’s market capitalisation could potentially worth up to RM861m – RM18.5b range (based on the book value and mobile subscriber’s market share methodology), with the former valuation method appearing to be more realistic, in our view. Meanwhile, we also do not discount that there could be some interesting corporate exercise in the making with Redtone, in view of their common major shareholders.

HSBB 2 project is expected to gain more traction to TM over the short-to-mid-term. Although the details of the HSBB 2 project has yet to be ironed out, we understand from the management that there is a strong data demand outside the high economic impact areas. Thus, we do not discount that the HSBB 2 project could potentially mirror the HSBB 1 project performance, which led TM’s Internet segment turnover to surge 81% to RM2.99b in FY14 from RM1.65b in FY10 (where the group’s Unifi service debuted after a 1.5-year product gestation period). Capex-wise, should the HSBB 2 project, which is classified under the public-private partnership (PPP) arrangement, duplicate the HSBB 1 structure, TM could potentially need to allocate RM1.4b capex (or 79% out of the RM1.8b) for the project.

Key takeaways from the Mobile World Congress 2015. With the spread of personalised smart devices such as smart phones and wearables, there will be increasing opportunity for Cellcos to not only tap into the government and enterprise markets, but also the individual consumer market with their IoT services. These could allow Cellcos to further monetarise their data investment and spur SIM as well as subscribers’ penetration. To reach these stages, network infrastructure, big data, as well as data centre investments are inevitable for all the players, and ultimately could provide network backhaul service providers/owners (i.e. TM and TdC) a bigger clout when negotiating with Cellcos moving forward. 

Source: Kenanga Research - 6 Apr 2015