We reiterated our NEUTRAL stand on the telecommunication sector. The industry incumbents have posted solid performances in 2017 and are set to continue to expedite their digital transformation as well as enhancing their operational efficiencies in CY18. Any excitements from the sector are likely to come from potential listing of edotco and U Mobile as well as M&A activities. Besides, our recent study on the global key listed towercos suggested that Asia towercos tend to have a higher financial leverage, PATAMI margin and ROE but lower PER as compared to the listed peers in the CALA and EUROPE region. All in, we made no changes to our Telco earnings forecasts and target prices. We continue to favour fixed-line over the mobile names with Telekom Malaysia (“TM”, OP, TP: RM6.85) remaining as our favourite pick for big cap while OCK (OP, TP: RM0.95) is retained as our preferred choice under the mid-cap telecom space. Meanwhile, while we maintained our MAXIS’ TP at RM6.10, its rating has been raised to OUTPERFORM (vs. MARKET PERFORM previously) in view of the recent share price weakness which could provide more than 10% total return from here. We reiterated our MARKET PERFORM call for AXIATA (TP: RM5.35) and DIGI (TP: RM4.90).

Solid 2017 performance. The sector incumbents reported reasonable 4QCY17 report cards that largely met expectations and continued to show some sequential operational improvements. Maxis reported its highest PATAMI in 4 years but still within expectations. Digi and Axiata’s 4Q17 results, meanwhile, came in without surprises despite the latter’s results partially impacted by widening losses in Idea. TM, on the other hand, performed inline with expectations despite competition and challenges as well as FY17 being a consolidation year for its service. Moving forward, all the industry incumbents are set to continue expediting their digital transformation as well as enhancing their operational efficiencies. While we concur with the industry players’ initiatives, we believe the sector will continue to remain stagnant while waiting for the next growth opportunity to arise. Besides, with increasing operational costs, spectrum scarcity and increased data demand, operators will need to work around the connectivity challenges with industry peers to sustain financial performance. Thus, we do not discount operators finding ways to strive for more efficiency gains via network collaboration/optimisation and/or lower customer acquisition costs.

What to expect in CY18. We expect mobile service revenue to see a mild dip (-0.8% YoY) in CY18 due to the prolonged industry-wide SIM consolidation and new access pricing structure. Besides, the continued competitive pressure in the IDD segment is also likely to weigh on Celcos’ service revenue. EBITDA margin, however, is likely to remain relatively stable, similar to the prior year as a result of the effective cost optimisation efforts. Besides, Capex is set to remain elevated due to spectrumrelated costs for 700MHz (where the result of the tender process is likely to be announced in mid-2018), and continued network expansion. Competition, on the other hand, is expected to remain heightened with key battle likely to focus on the prepaid segment, product upselling, and data monetisation. U Mobile, Unifi mobile and other MVNO players are likely to continue gaining subscriber market share as the big-3 incumbents tend to focus on acquiring revenue-generating subscribers, thus leaving the price-sensitive sub-segments to the smaller operators. Any excitement from the sector is expected to come from: (i) potential listing of edotco and U Mobile, and (ii) M&A activities.

Tower studies. Our finding on the global key listed towercos study suggested that; (i) a pure towerco’s EBITDA margin is likely to be within the range of 50-60%, and (ii) Asia towercos tend to have a higher forward: (a) financial leverage, (b) PATAMI margin (which we believe could be partially due to favourable interest and taxation rate environment), and (c) ROE (as a result of better PATAMI margin) as compared to the peers in the CALA (Centra and Latin America) and EUROPE regions. Nevertheless, Asia towercos’ forward PER ratio tend to be lower given the EBITDA/site is less compelling (which we believe could be due to higher number of roof-top towers vs. monopoles) as compared to other regional peers. In addition, we also downplay the likelihood of edotco and OCK to list their tower assets under the REIT structure in view of the limitation of the financial leverage (where REIT companies typically have a low gearing ratio of <1x, thus constrainting the towercos from expanding their tower portfolio further) and land ownership issue (where towercos tend to lease rather than acquire the land for their towers).

Maintain NEUTRAL sector weighting due to stiffer competition and data monetisation challenges. The sector is currently trading at 10.3x EV/EBITDA in FY18, at a 19.8% premium as compared to the regional average of 8.6x. We expect modest performance for all the telecom stocks in 2018, supported by the decent dividend yield of 3.4%. We continued to favour fixed-line exposure over the mobile names under the current challenging times given the latter’s earnings are set to be affected by heightened competition. TM (OP, TP: RM6.85) remains as our favourite pick for the big cap due to (i) its long-term growth opportunities arising from its increasingly widening broadband and network coverage, (ii) lesser competition in its fixed-line broadband business, and (iii) its laggard performance YTD, which could provide room for the stock to play catch-up when trading sentiment improves. Besides, we continue to favour OCK (OP, TP: RM0.95) under the mid-cap telecom in view of its (i) healthy cash flow on the back of escalating recurring income trend, (ii) ability to ride with the passive infrastructure sharing trend, and (iii) expanding EBITDA margin trend. Meanwhile, we also raised our MAXIS call to OUTPERFORM (from MARKET PERFORM previously) with unchanged TP of RM6.10 as the recent share price weakness could provide bargain hunting opportunity given a potential total return of c.12%. We maintain our MARKET PERFORM calls on AXIATA (TP: RM5.35) and DIGI (TP: RM4.90).

Source: Kenanga Research - 16 Mar 2018