Some surprises in 3QCY19 results. Within our coverage, TM was the only stock which delivered better-than-expected results, as its cost saving efforts yielded better-than-expected results. However, this also came from some delayed spending in capex, which management assures to keep with its guidance for FY19. To recap on the other stocks which performed within; (i) AXIATA saw top-line boosted by better numbers in regional operations with profits buoyed by efficiency gains from larger OpCos (Celcom, XL), (ii) DIGI continued with its revenue and earnings’ decline as expected, with the softening of the prepaid segment but better margin was recorded on operational improvements, (iii) MAXIS’ flattish revenue came from poorer service revenue but was buffered by stronger device sales, which translated to poorer earnings on higher staff cost and depreciation, and (iv) towerco OCK performed in-line with the anticipation of lumpier 4Q earnings from higher tower deliveries.

The road to 5G. MCMC has revealed that it identified the 700MHz, 3.5GHz and 26/28GHz bands for the roll-out of 5G in the country. Also, in the statement the regulator indicated that the first two bands would be allocated to a consortium formed by multiple licensees as opposed to the current individual licensee structure. This would put an end to any speculation hailing a national infrastructure provider, as the proposed structure could lean towards greater emphasis in network and infrastructure sharing which could minimise costs from any one operator while preventing duplication of resources. We see that this structure would also make sense, with most incumbents having forged partnerships and collaborations for an eventual joint-deployment when the spectrums are made ready. Even towerco OCK has signed a memorandum of understanding with China Unicom to collaborate in mobile infrastructure and network services initiatives. For the 26/28GHz bands, MCMC looks to assign the 24.9-26.5GHz range via a tender process with the 26.5-28.1GHz to be awarded on a first-come first-serve basis. However, no indicative spectrum pricing has been provided at this juncture. With the completion of the assignment process, MCMC expects that we could see the commercial deployment of 5G by 3QCY20.

For the shorter road ahead, the NFCP (National Fiberisation and Connectivity Plan) is slated for the first round of tender awards in January 2020 for the installation of network facilities and services based on 3G and 4G technology in selected regions. This works to meet one of the objectives to achieve average connectivity speeds of 30Mbps in 98% of populated areas by 2023. The move to introduce entry-level fixed broadband package at 1% of GNI (est. RM40/mth) should also be on its way this year. However, the quality of service to be provided could require further feasibility studies, especially in rural areas.

Maintain Neutral on Telecommunications. We anticipate investors to be fairly passive towards the sector until more solid developments and news flows arise, namely on the assignment of the abovementioned spectrums and further tie-ins or collaborations between the incumbent players. Adding to this, hesitation could also arise with implications arising from higher-thanexpected capex (mainly on spectrum pricing and 5G needs). This could be a near-term double-edged sword to the assignees as higher operational spending could dent earnings potential. The nature of 5G itself may not paint an overly encouraging picture, as the industry would have to determine: (i) the commercially viable pricing, (ii) demand and early adoption rates given the lack of applications requiring the technology in the immediate future, and (iii) general maintenance costs for the new technology. Nonetheless, the proposed consortium structure should ease the pains of any one network operator. On other fronts, U Mobile’s pursuit for a public listing re-emerges, with the tentative timeline at end-2020 to raise up to USD500m.

Top pick for the sector is TM (OP, TP: RM4.30). We see an attractive opportunity for TM. Building a case for TM, we present two separate scenarios for consideration; (1) TM partakes in the deployment of 5G network infrastructure provider, having the widest fibre network which it would administer with the incumbent celcos and in turn to boost its own mobile initiatives, or (2) TM fails with its bid and focuses on its core broadband and fixed line business, where it could continue to reap its cost savings efforts and pushing its endeavour to fulfil NFCP agendas. Both scenarios offer favourable risk-to-reward ratios at current price point (trading at below 5.5x EV/Fwd. EBITDA, 0.5SD below its 3-year mean. A little up ahead, risk-tolerant investors could also take a bet for the possible re-entry of the stock into the KLCI during the June 2020 review.

Source: Kenanga Research - 2 Jan 2020