MAXIS, AXIATA and DIGI have accepted the Malaysian Communications and Multimedia Commission’s (MCMC) offer on the reissuance of their respective 2100MHz spectrum band, effective April 2, 2018. All three players have paid the price component payment of RM118.4m each and would be paying RM50m in annual fees, payable before 15 December throughout the assignment period of 16 years. All in, we have tweaked our MAXIS/AXIATA/DIGI’s FY18 PATAMI by -0.9% to -1.6% to reflect the latest spectrum fee. We continue to favour fixed-line over the mobile names under the current challenging times given that the latter’s earnings are set to be affected by heightened competition. Telekom Malaysia (OP, TP: RM6.85) remains as our favourite pick for big cap space while OCK (OP, TP: RM1.05) is maintained as our preferred choice under the mid-cap telecom space. Meanwhile, we maintain our MARKET PERFORM call on MAXIS (TP: RM6.10) and DIGI (TP: RM4.90). Our AXIATA’s rating and target price (current rating is MARKET PERFORM, TP: RM5.15) is currently under review, pending today’s 4Q17 result release by XL AXIATA (a 66.4% owned subsidiary of AXIATA). We maintain our NEUTRAL view on the sector.

Accepted the reissuance of 2.1GHz spectrum assignments. The country’s Big-3 mobile incumbents – Maxis, Axiata, and Digi have announced to accept the reissuance of their respective 2100MHz spectrum offers from the Malaysian Communications and Multimedia Commission (MCMC) on Tuesday. The 2100MHz spectrum assignment comprising of 2x15MHz (FDD) and 1x5MHz (TDD) with a validity of 16 years, is effective on 2 April 2018.

Spectrum price and specification. Similar to the other prior assigned spectrums, the 2100MHz assignment fee also consists of two components, namely Annual Fee and Price components. The Annual Fee of the said spectrum block (2x15MHz) has been set at RM50m throughout the validity period of the spectrum assignment and need to be settled before 15 December of each year. For the Price component, all the Big-3 incumbents have to pay RM118.4m for an upfront payment, which they had settled prior to 1 February 2018 in one lump sum. Despite the current usage of the 2100MHz band is still dedicated to the 3G technology, we understand that the band is similar to other spectrum bands that have been assigned as technology agnostic by the authority. Thus, suggesting that these spectrums are unbiased towards the use of different technology apparently (i.e. able to opt for deploying the 2G/3G/4G technology when required).

Higher than the expected price tag. We were surprised that the assigned 2100MHz spectrum price is 40.5% higher (by using 2 x 5MHz price tag as a comparison benchmark, figure 2) than the 1800MHz band as the latter is generally valued higher due to its wider coverage, and better indoor signal strength, thus suggesting higher capex saving. Nevertheless, despite the relatively higher price tag for the 2100MHz spectrum, we do understand that network service providers require a combination of higher and lower frequency's bands to provide better network coverage and capacity. Besides, the said spectrum has a lower required up-front cost (in terms of the percentage out of the total spectrum fee charges) as compared to the previous 700/900/1800MHz bands (12.9% vs. 43.7%), thus providing better cash flow and balance sheet management to the Celcos.

Minimal financial impact. Similar to the 900MHz/1800MHz spectrums, Celcos are set to amortize the spectrum cost throughout the usage life span (figure 3). We have factored in the annual spectrum amortisation cost of RM57.4m (for 2100MHz spectrum) into our financial modelling, thus lowering our MAXIS/AXIATA/DIGI’s FY18E PATAMI by 1.6%/1.0%/0.9% (to RM2.04b/RM1.51b/RM1.44b), respectively. Our FY17E PATAMI, however, remain unchanged given the renewed said spectrum is only effective from 2 April 2018 onwards.

Source: Kenanga Research - 2 Feb 2018