We are keeping our OVERWEIGHT call on the telecommunication sector as current share price weakness could still provide a great bargain hunting opportunity for investors. Broadband connectivity has been in the limelight recently with the authority planning to widen the coverage through the implementation of the National Connectivity Plan via a combination of fibre-optic and wireless connectivity. Our recent 5G study suggested that many elements of 5G technology are expected to leverage on the current 4G networks. Active network sharing, pooling spectrum and equipment shall be the new mantra of telecom to lower the investment cost under the 5G era. All in, we made no changes to our Telcos’ earnings forecasts and target prices (except MAXIS, where our rating has lowered to MARKET PERFORM with an unchanged target price of RM6.05), pending their upcoming results review. DIGI (OP, TP: RM4.90) and OCK (OP, TP: RM0.850) remains our preferred pick for the big/mid-cap telecom.

All about broadband. While the country has a relatively high broadband penetration rate of 115.9% (per 100 inhabitants) as of end 1Q18, the contribution was mainly from the mobile rather than the fixed-line segment. Indeed, the mobile broadband users base has continued to climb and hit 81% penetration rate (based on the subscription basis) in 1Q18 vs. 6.9% in the fixed-broadband space. With the mobile market reaching saturation with growth easing, the broadband, particularly the mobile broadband, is seen as a growth engine to drive the sector moving forward.

The Internet – basic rights for all Malaysians. The authority has highlighted its intentions to treat the Internet as one of the basic rights for all Malaysians through the National Connectivity Plan, which set to increase internet access throughout the nation via a combination of fibre-optic and wireless connectivity. The move is expected to open up fixed broadband competition where Tenaga National Bhd is likely to join the party. Nevertheless, we believe, Telekom Malaysia, being the pioneer and infrastructure owner of the HSBB projects, will still able to defend its fixed broadband territory via its vast technical-know-how and last mile connectivity experience. On the wireless connectivity front, we reckon the authority will encourage more active network sharing within the industry and to leverage on the operators’ current 3G/4G networks, especially in the rural areas. Besides, we also do not discount that the government may aspire to speed-up the investments in 5G once the international spectrum framework is cloudless.

5G – the future network. A number of mobile 5G commercial launches are expected over the next three years with China, the US and Japan set to be the leading countries in 2025, according to GSMA. To support customer migration and further drive consumer engagement in the digital era, GSMA is predicting that mobile operators will invest USD0.5 trillion in mobile capex worldwide between 2018 and 2020. While many things along the journey to 5G are still uncertain for now, many elements of 5G technology are expected to be build on the current 4G networks and allow operators to optimise its infrastructure investment. On the 5G spectrum front, ITU (International Telecommunications Union) has identified 3.4-3.8GHz and 26GHz (of which 3.5GHz and 26/28GHz were the most popular bands under the recent trial) as the pioneer bands for the upcoming technology. Celcom had run Malaysia’s first-ever 5G trial in partnership with Ericsson in mid-2017 while Digi’s parent, Telenor Group, has conducted its first 5G test since March last year with technology partner Huawei, and will start with offering 5G in Norway before expanding to other countries.

Mobile World Congress 2018 Shanghai. Our recent trip to the Mobile World Congress 2018 in Shanghai also suggested a similar trend where the MWC highlighted various key developments that are set to shape the mobile industry, which include 5G, IoT, Artificial Intelligence (AI), and automotive.

2Q18 report cards – so far so good. Both MAXIS and DIGI have delivered a decent set of results in 1H18. Although their service revenues came under pressure (on a year-on-year basis) as a result of the weaker prepaid segment coupled with the adoption of MFRS 15 accounting standard, both companies have managed to sustain or even enhance their normalised EBITDA (in an absolute term) as a result of better operational efficiencies. AXIATA, TM and OCK, meanwhile, are set to release their numbers by the end-August. While we do not expect any drastic changes to our full-year core PATAMI estimates, we do expect short-term operational hiccups in 2Q18 at the reported earnings basis –AXIATA (technical impairment in its investment in India); TM (lower sales and profit as a result of the recent cabinet reshuffle post the general election) and OCK (lower local sales amid cautious mode adopted ahead of the 14th GE and unrealised forex losses arise from its USD loan).

Mainained OVERWEIGHT rating for now. We made no changes to all our telecom companies’ FY18-19E earnings as well as their respective target prices, pending their respective upcoming results releases. We continued to favour DIGI (OP, TP: RM4.90) under the big-cap space due to its relatively resilience earnings and decent dividend yield. OCK (OP, current TP: RM0.850) remains as our preferred pick 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. While we are keeping our MAXIS’ TP unchanged at RM6.05, its rating, however, has lowered to MARKET PERFORM (vs. OUTPERFORM previously) as the share price had performed well since our last upgrade (dated 4-July) and now provided <10% upside from here. Our OUTPERFORM ratings on AXIATA (current TP: RM5.00) and TM (current TP: RM4.00) are currently under review, pending the upcoming results review.

Source: Kenanga Research - 20 Aug 2018