We reiterate our NEUTRAL call on the telecommunication sector. The authority has clarified that the upcoming spectrum reallocation will involve the 900MHz and 1800MHz bands. These two bands of spectrum will be assigned for a fee to Celcom, Digi, Maxis and U Mobile for a period of 15 years through reallocation and bidding process. While the authority’s intention appears negative to the big players (especially to Maxis and Celcom) at the first glance, the actual operational impact may not be severe in our view. We believe the authority may likely take the recent spectrums’ auction price set by regional countries as part of their considerations when determining the price, thus suggesting that the auction ‘fair’ price of each megahertz in the 900MHz band are likely to be priced at RM175m-RM456m range and c.RM156m for the 1800MHz band. Valuation-wise, we make no changes to all our telco companies’ FY15-FY16 earnings estimates. We reiterate our OUTPERFORM call on TM (TP: RM7.00) and Axiata (TP: RM6.30) while keeping our MARKET PERFORM call on Maxis (TP: RM6.31) and Digi (TP: RM5.15). TM remains our favourite pick for the sector given: (i) less competition in its fixed-line broadband business, and (ii) potential better-than-expected synergies from P1.

Spectrum reallocation. MCMC Chairman Dato’ Sri Dr Halim Shafie indicated that the 900MHz and 1800MHz bands will be reallocated among four players by August this year. The decision is in line with the government’s decision to optimise the use of spectrum resources through reallocation and bidding. According to MCMC, these two bands of spectrum will be assigned for a fee to Celcom, Digi, Maxis and U Mobile for a period of 15 years. The authority intends to issue the spectrum assignment to all four players by August 2016 for full implementation by 1 July 2017. On top of that, the authority also showed its intention to reallocate other spectrum bands, which include the 700MHz, 2300MHz, 2600Mhz band, etc. by the end of 2016.

Why four players? MCMC explained that the selection of these four players is because they already have sufficient infrastructure to expand and increase competition in the industry. The reallocation and conversion to spectrum assignment would provide more certainty on the length of time allowed to these four players to have the right to use the spectrum. According to Dr Halim, the fee for the spectrum is currently being determined. Similar to the previous practice for the 3G spectrum, payments will be in phases, which will allow them to roll out services and not pass the cost to consumers. He also said that this reallocation exercise is to ensure that spectrum will be used in the most efficient manner.

Bigger Digi and U Mobile in the making? The latest MCMC’s statement provided a much-needed clarity to the public with regards of the upcoming spectrum reallocation plan. Similar to our earlier prediction, the first spectrum reallocation plan is set to involve the 900MHz and 1800MHz bands. The decision to allow U Mobile to participate in the spectrum reallocation plan will provide a challenge to the big three mobile operators, especially Celcom and Maxis due to their massive holdings in these spectrums. Having said that, while the authority’s intention appears negative to the big cap telecom players (especially to Maxis and Celcom) at the first glance, the actual operational impact may not be severe in our view. The reasons are: (i) Cellcos are transmitting their legacy network to SingleRAN, which allow operators to provide seamless mobile services under decent spectrums with single network, (ii) the authority is expected to ensure operators minimize network disruption during the re-farming period, thus suggesting that sudden surge in churn rate is unlikely, and (iii) new network technology may emerge to provide better spectrum management. All in, we believe that the big cap telecom players could potentially surrender some spectrums to the authority, but impact on earnings will very much depend on the auction results should they decide to participate. Potential beneficiaries for these spectrums reallocation exercise will be Digi and U Mobile given their relatively lesser spectrum in these frequencies.

Spectrums’ fair price. As we highlighted in our earlier sector report (Title: Feeling The Heat) in 29-January 2016, the price of the spectrums varies from country to country or even on a case by case basis depending on the usage of the spectrum lot, bidders’ financial capability (under the spectrum auction scheme) as well as the reserve price, if any. Nevertheless, we believe the authority may likely take the recent spectrums’ auction price set by regional countries as part of their considerations when determining the price. The latest spectrums auction conducted in Thailand, Hong Kong and Singapore suggested that operators were willing to pay a higher price for the 900MHz band as compared to the 1800 MHz band. Separately, we also understand that Digi paid a whopping RM700m (implied RM175m per megahertz) to secure the rights on its 2x2 900MHz spectrum licence from Time dotCom on 7 May 2008. As a result, we believe the auction price of each megahertz in the 900MHz band are likely to be priced at RM175m-RM456m range and c.+/-RM156m for the 1800 band.

Source: Kenanga Research - 2 Feb 2016