We are keeping our NEUTRAL call on the telecommunication sector. Competition in the home broadband segment is expected to esclate following increasing interest shown by various media and telecommunication incumbents. Besides, we also do not discount a potential hiccup in the 700MHz spectrum. The latest Internet users survey has shown some shifts in users’ behaviour and trends, which could prompt the industry incumbents to revise their respective strategies. All in, we made no changes to our Telcos’ earnings forecasts and target prices. DIGI (MP, TP: RM4.65) and OCK (OP, TP: RM0.650) are our preferred picks in the big/mid-cap telecom space.

4Q18 results snapshot. Most of the mobile incumbents (except DIGI) posted disappointing set of FY18 results due mainly to the higher-than-expected OPEX and D&A charges. The aggregate topthree mobile incumbents’ total revenue climbed 3% YoY (to RM23b) in FY18 with service revenue dropping 1.7% to RM19.9b, partially due to the impact of MFRS15. The combined top-three’s mobile subscriber base, meanwhile, saw market share continued to shrink to 72% (vs. 74% in FY17) due mainly to the lower prepaid subscribers as a result of stiffer competition. On the fixed-line segment front, TM was impacted by persistent headwinds in the industry and operating landscape throughout 2018. OCK, meanwhile, posted a decent report card in FY18 with regional contribution continuing to climb despite some slowdown in the local segment.

Full internet connectivity nationwide. The recent broadband services launched in Jasin, Melaka marked the pilot project under the Naitonal Fiberisation and Connectivity Plan (NFCP) to provide high-speed internet connectivity for rural areas. While the evaluation of the pilot project has yet to be concluded, several mobile and media incumbents already in talks with numerous access providers to explore opportunities in the home broadband segment to align with the government’s NFCP objectives. Note that, the NFCP project, which combines the use of fibre optic and wireless connectivity, is targeting to achieve 98% baseline coverage in inhabited areas by 2023 with a minimum bandwidth of 30Mbps. Although the home broadband segment is able to cater for more players, competition is expected to be intensified over the short-to-mid-term. While TM’s near-term prospect is expected to remain cloudy as a result of the revised MSAP framework as well as heightened competition in the home broadband segment, the group, being the pioneer in the quadruple-play services and infrastructure owner of the HSBB project, is likely to sail through the challenging wave over the mid-to-longer term in view of its extensive networks (>540k km of fibre nationwide and access to more than 190k km submarine cable worldwide) coupled with vast technical-know-how and last mile connectivity experience.

Potential delay in the 700MHz spectrum awards? Despite MYTV being committed to meet the analogue switch-off (ASO) 1Q19 deadline set by the government (according to the press reported in late-2018), there is no solid update since then. Simultaneously, more uncertainties are likely to appear following the recent contract dispute with Green Packet Bhd related to the supply of set-top boxes under the digital terrestrial television (DTT) infrastructure project. Without a successful ASO, the current 700MHz broadcasting frequency spectrum would not be freed up to use for telecommunication purpose. We understand that the authority is currently working on a spectrum study to identify optimum spectrum use for providing mobile services and has tentatively set to release the 700MHz assignment documents in year 2019 followed by the 2300MHz and 2600MHz a year later.

Latest internet users trend. MCMC has released its latest study on the Malaysia’s internet users’ behaviour and trends. Under the study, internet users (at the national level) have increased from 24.5m (76.9%) in 2016 to 28.7m (87.4%) in 2018 with smartphone remaining as the most common device used to access internet. Internet has become a pivotal medium in social engagement with text communication and visiting social networking platform were the most common activities for internet users (96.5% and 85.6%, respectively). WhatsApp and Facebook were the most popular communication and social networking platforms. Interestingly, users’ own home (at 88.6% vs. 85.6% in 2016) remained the most frequent place to go online while mobilility or on-the-go (68.1% vs. 84.0% in 2016) as well as free Wi-Fi anywhere (i.e. cyber café, 36.3% vs. 55.9%) have loss traction since 2016, which we believe was partially due to the better network coverage and services thus giving users easier access to the internet in the comfort of their home. Meanwhile, participation in online banking and financial activities has increased with more than half (54.2%) of internet users used the service vs. 41.7% in 2016. Thus, with the rising number of internet users and increase in users’ trust in online banking facilities, these could provide more opportunities in the flourishing digital economy and development of a cashless society. All in, the current National Fiberisation and Connectivity Plan (NFCP) is set to improve broadband quality and coverage over the years. With the rising number of households with internet access, telco operators would likely continue to offer or tie-up with the relevant service/OTT platform providers to suit the users’ latest behaviour and trend.

Maintain NEUTRAL rating. We make no changes to all our telecom companies’ earnings forecasts. Digital transformation, cost rationalization and network monetization are the common missions among the incumbents in FY19. While we do not have any OUTPERFORM call in the big cap names, we prefer DIGI (MP, TP: RM4.65) among others in view of its relatively stable earnings prospect coupled with the above-industry dividend yield. We retained our MARKET PERFORM call on AXIATA (TP: RM4.35) and

TM (TP: RM3.10) with UNDERPERFORM rating on MAXIS (TP: RM4.90). We continue to favour OCK (OP, TP: RM0.650) in the mid-cap segment 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.

Source: Kenanga Research - 3 Apr 2019