Maintain NEUTRAL call for the telecommunication sector. The government has expressed its broadband vision and mission during yesterday’s conference with the investment community. Apart from planning to open up the sector to foreign telecommunication players, the authority also elaborated on the NFCP as well as its 5G aspirations. The government’s broadband agenda is set to benefit subscribers and the country over the mid-to-long-term but at the expense of the sector’s incumbents, at least in the short-term. All in, while we made no changes to our Telcos’ earnings forecasts and the stock ratings, we lower their respective target prices to account for the challenges ahead. DIGI (MP, TP: RM4.65↓) is the preferred pick for the sector while OCK (OP, TP: RM0.750↓) is retained as our preferred choice in the mid-cap telecom space. We reiterate our MARKET PERFORM rating on MAXIS (TP: RM4.60↓), AXIATA (TP: RM5.55↓) and TM (TP: RM3.10↓).

Opening up the telecommunication sector. Malaysia is in talks with several foreign companies (which include players from Japan and South Korea with more firms from France and the United Kingtom later) to potentially allow them to offer broadband services to boost the nation broadband connectivity and spur greater competition, according to Communications Minister Gobind Singh Deo. With merely 18% households having access to high-speed broadband services, the government feels that such an infrastructure is needed to support the growth of digital economy moving forward. Meanwhile, the government also highlighted the network facility provider (NFP) and network service provider (NSP) licences would be liberalised to promote competition and ensure continued growth of the industry and benefits for the consumer.

National Fiberisation and Connectivity Plan’s (NFCP) framework. The authority also elaborated on the NFCP during the investor conference yesterday. The government is aiming to increase broadband coverage in populated areas by at least fivefold to 98% by 2023 with a minimum speed of 30Mbps via the deployment of the 700MHz spectrum as well as phasing out the copper networks. It also sets a target of gigabit-speed Internet services for selected high-impact and strategic industrial areas by 2020, and all state capitals by 2023. The aim is to ensure those areas where there are high-use cases for the upcoming 5G technology would be ready for network deployment when the standards are finalised. Besides, the government also targets to provide fibre connection to 70% of all schools, government offices, hospital, clinics, police and fire stations by 2022.

5G aspirations. While the 5G New Radio (NR) specification is still maintained on its standardisation path, the government is set to turn Cyberjaya and Putrajaya as the 5G testbed areas. The Malaysian Communications and Multimdedia Commission (MCMC) would lead the 5G trials by setting up a task force that include the local governments of Cyberjaya and Putrajaya with an aim to learn about and iron out policies, according to the minister. In addition, the authority also indicated that beginning November 2018 for a period of one year, telecom, vendors, researchers, startups and technology adopters would be invited to carry out 5G trials in Cyberjaya and Putrajaya in order to explore the practical uses and modes of implementation.

Likely getting more clouded. Competition is expected to escalate further should the government decided to open up the industry to foreigners. With a population of c.33m; mobile penetration rate of 134% (or 44m subscribers); and broadband penetration of 118% (of which fixed broadband accounted for c.6.7% (or 2.6m subscribers as of end 2Q18) market share), additional telecom player(s) on top of the existing incumbents will make the local telecommunication industry more clouded. There is no surprise that the regional/global players showed interest to Malaysia’s telecom sector given the country’s mobile segment is one of the very few markets still able to provide more than mid-40s% EBITDA margin (vs. 20s%-30s% range in the regional countries) coupled with a low high-speed fibre broadband penetration rate. Nevertheless, we do not discount that the government may open up the sector via divesting some of their stakes in the local telecom companies (rather than to issue new licenses to the foreign telecom player(s)) to accelerate the industry and technology evolution progress.

Bumpy road ahead for the industry players. The reduction in broadband prices coupled with higher Internet speed and wider network coverage ahead are set to benefit broadband subscribers and the country moving forward. This, however, is at the expense of the industry players, at least in the short-term, given that such government’s broadband agenda will derail especially the fixed-line players’ capex rollout programme, The capex review, meanwhile, is also expected to shape the infrastructure service provider, i.e. OCK, local players’ prospect. Besides, the sector’s incumbents are also likely to face a great challenge ahead to sustain the profitability should any of the price war arise following the entry of new entrants.

Maintain NEUTRAL rating for now. While we made no changes to all our telecom companies’ FY18-19E earnings and stock ratings (pending their respective upcoming results releases and clarification), we have reduced their respective target prices after raising our WACC assumptions to account for the above-mentioned challenges ahead. DIGI (MP, TP lowered to RM4.65 vs. RM4.90 previously) remains our relative preference pick for the sector while OCK (OP, TP trimmed to RM0.750 vs. RM0.800 previously) continued to be our preferred choice in the mid-cap segment. Our AXIATA, MAXIS, and TM’s ratings, meanwhile, are maintained at MARKET PERFORM but target prices have lowered to RM4.60/RM5.55/RM3.10 (vs. RM4.80/RM6.05/RM3.55 previously), respectively.

Source: Kenanga Research - 10 Oct 2018