Following the Malaysian Communications And Multimedia Commission’s (MCMC) public inquiry on the allocation of the 700MHz, 2300MHz and 2600MHz spectrums, telco operators have provided feedback on their views regards to the respective spectrums on (i) award mechanism and timeline of assignment; (ii) optimum spectrum blocks per operator for assignment; and (iii) proposed assignment fees. Though similar positive merits are shared amongst the industry players on the release of the 700MHz band as a preferred enabler of expanding nationwide coverage of 4G LTE, opinions differ on the other aspects of the proposed allocation. Varying suggested price methodologies leave much to consider in determining a fair value for the spectrums’ assignment. Our NEUTRAL call for the sector remains unchanged. However, we take this opportunity to re-rate TM (TP: RM3.95) to OUTPERFORM on its share price weakness subsequent to adverse market reaction on the fixed-line provider’s decision to branch aggressively into the highly competitive and saturated mobile market.

Ideas open for consideration. The first public inquiry by the MCMC was initiated on 1st July 2019 to gather opinions from industry players and the public on questions with regards to the proposals on the timeframe, implementation, technical matters and spectrum fees for the upcoming allocation of the 700MHz, 2300MHz and 2600MHz bands. We see this also as a step-up for the MCMC in presenting a more inclusive and transparent positioning on spectrum matters, which greatly affects the success of National Fiberisation and Connectivity Plan (NFCP) agenda. This is reflective from the MCMC making the submissions publicly available after its deadline on 30th August 2019. For the purpose of this report, we do away with the highly technical question with regards to the mitigation of interference between FDD and TDD blocks to facilitate efficient spectrum utilisation in the 2600 MHz band.

Bumping heads. A total of 15 submissions came in response to the public inquiry. We gathered from the submissions that industry experts share differing views with regards to the subjects at hand. The use of a beauty contest (comparative tender) approach appears to be favoured by market leaders as a more merit-based method could lead to more effective use and implementation of the spectrum licenses. On the other hand, several others are of the opinion that this prevents smaller set-ups from participating, mainly due to their lack of scale, which discourages a more inclusive and competitive market environment. In terms of timing, most participants concurred with MCMC’s proposed timeline to sort the (re)assignments to be readily available for public service. With regards to spectrum allocation, disagreement arises on whether there should be an equal distribution of bandwidth to let commercial and shareholder’ interests be the main drivers to maximise consumer experience or concentrating allocation to a single or two operators in achieving the most optimal results in the shortest period of time. On pricing, several interesting propositions were made for MCMC’s consideration, but common ground was laid in the sense that MCMC should keep pricing with an eye on: (i) operators’ capital expenditure to deploy the spectrum, and (ii) declining ARPU rates, which may lead to operators requiring greater effort to recoup their investments.

(refer to the overleaf for details of the questions presented and excerpted feedback from key mobile network operators)

Weighing our thoughts on the matter. While we reckon that most of the feedback provided would have some aspects of guarding commercial interest, we share similar feelings with market leaders being pro-beauty contest approach as national interests remains paramount and regulators will need to ensure only the most capable operators can lead the forefront especially when setting foot on new terrain. We believe that timing of the assignment should be made as early as possible as market players should naturally be able to adapt and cope with new changes in the industry. Providing leeway could prevent the cream of the crop from realising their fullest potentials. On allocation, though there is merit in condensing the spread to a specific few operators to optimise infrastructure and enable participation by others through wholesale agreements, it may not be the best approach in encouraging market competition which ultimately would strive towards driving the best benefit to consumers. (We break down our opinions further in the overleaf)

Maintain NEUTRAL on the telecommunications sector. We anticipate prospects within the sector to largely be driven by a race for cost efficiency. Celcos continue to be challenged by competitive pricing and the migration of subscribers towards more value-for-money packages while sector-wide operational cost fixing comprises mainly rationalising network and squeezing direct costs. While we leave our assumptions unchanged at this moment, we direct attention towards TM (TP: RM3.95) which saw huge selling pressures following the fixed-line operator’s decision to heavily invest in the mobile business (Unifi Mobile) which is facing competitive headwinds while also being highly saturated, as mentioned above. While this is expected to crimp into any cost savings, it worked hard for (on greater infrastructure and marketing spending), we remain steadfast from assuming the worst given that it is not an entirely fresh venture for the group, with Unifi Mobile being in the market since Jan 2018. Further, it was anticipated that 2H19 would see lesser cost improvements as compared to 1H19 as the cost reduction quantum is typically highest during the initial stage of each rationalisation program. On this premise and that there could be an overreaction from the market, we upgrade our call for TM to OUTPERFORM from MARKET PERFORM, leaving our DCF-driven TP of RM3.95 (based on WACC: 9.7%, TG: 1.5%) unchanged.

Source: Kenanga Research - 10 Sept 2019