We upgrade our call on the telecommunications sector to OVERWEIGHT from NEUTRAL. Amidst the ongoing slump in the market, we see this as an opportunity to accumulate stocks in a resilient industry. Despite still seeing some declines, telco stocks have mostly fared better than the FBMKLCI. Listed players are facing intensifying competition to cater the growing demand needs of consumers, with unlimited data plans slowly becoming a staple offering between cellcos. We anticipate the rollout of 5G to see some hiccups arising from a new government and to some extent, the ongoing Covid-19 pandemic. Still, we do not anticipate significant swings to our estimated corporate earnings during the year, regardless of it meeting the earlier intended 3QFY20 commercialisation timeline. We present TM (OP; TP: RM4.30) as our Top Pick for the sector, reinforcing our dual strategic view of either (1) it continues to play a significant role in the deployment of 5G infrastructure with its extensive fibre network, or (2) it focuses on its core fixed line and fibre business while riding on its leaner cost structure, with both scenarios resulting in positive outcomes. We also like DIGI (OP; TP: RM4.65) for its consistently high ROE (+200%) and highest dividend yield in the sector (c.4.4%), which could cushion investors in this volatile market environment.

Telcos, a resilient choice in turbulent times? With the ongoing slump in the stock market, investors are seeking resilient names and potential value buys to ride through the uncertainty. We stand by the notion that telcos are favoured picks during an economic downturns as: (i) the nature of its services are fundamental societal needs (be it fixed line or mobile) and deemed to be immune to economic slowdown, and (ii) it operates in a matured industry, hence disruption in capex plans would not be detrimental to its overall performance. Additionally, tracking YTD stock prices, the majority of telco stocks (DIGI, MAXIS, and TM) have declined but performed better than our benchmark bourse index, which could suggest stronger investors’ confidence against other blue chips. (refer to the overleaf for Appendix: YTD Price Performance: Telco stocks vs FBMKLCI)

Value-hunting in a downturn. In this note, we maintain our earnings and target prices for all our stocks as we anticipate the near term sustainability of the sector to be relatively unaffected by recent events. With this, all except MAXIS (MP, TP: RM5.10) are OUTPERFORM calls. In light of passive investors’ behaviour and sentiment, we present the following study to demonstrate hypothetical valuation scenarios (mainly through terminal growth (TG) adjustments in our DCF valuations) to determine how stressed our target prices could be in the face of market uncertainty.

Based on the presentation above, even if we were to expect TG to be 0% (only likely if the economy is in a state of deflation), three names continue to stand out as value-buys, namely AXIATA, OCK and TM. This could further support that the sector is in an oversold state with earnings and positives not priced in at current levels (subject to results performing in line with our expectations).

Upgrade to OVERWEIGHT from NEUTRAL. As market capitalisation took a hit from recent sell-downs, we believe investors should consider accumulating telco stocks as defensive picks. Following selling pressures, we upgrade DIGI (TP: RM4.65) and

OCK (TP: RM.0630) to OUTPERFORM. Our Top Pick remains to be TM (OP; TP: RM4.30). Strategically, we believe TM is in a favourable position centred around the deployment of 5G. TM will likely see a spike in sentiment if (i) it successfully participate in the deployment of 5G network infrastructure, having the widest fibre network which it would administer with the incumbent celcos and in turn to boost its own mobile initiatives but (ii) should TM fail with its bid and focuses on its core broadband and fixed line business, it could continue to reap its cost savings efforts and pushing its endeavour to fulfil NFCP agendas. While AXIATA remains an OUTPERFORM call, it is likely that the halt in talks between Telenor and Khazanah in acquiring the latter’s equity interest could leave investors disinterested for the time being. The same could be said about the continuous drag from its digital segments. Still, its regionally diversified operations could allow it to mitigate the impact from an aggressive rise in local competition.

FY19 ended with a mixed bag. Of the 5 players within our coverage, only DIGI exceeded expectations from stronger-than expected performance that could be attributed to cost savings seeing further mileage. On the other hand, AXIATA fell short as although its mobile segments were reporting the growth which we expected, its digital businesses fell into deeper losses which we did not anticipate. Meanwhile, towerco player OCK registered a 16% growth which was still lower-than-anticipated from delays in the deployment of towers in Myanmar. Stocks that performed as expected; (i) MAXIS saw lower earnings as service revenue dipped in both prepaid and postpaid segments while (ii) TM continued to reap better margins from its cost savings efforts against lower voice and internet contributions. Interestingly, post-results, only MAXIS provided positive guidance for FY20 (refer to Appendix: Compiled FY20 guidance)

“Unlimited” data plans to stir the playing field. Recently, a growing number of unlimited data plans have been introduced. U Mobile has the cheapest offering starting at RM50/month, followed by Celcom at RM98/month and Digi at RM100/month. Only Maxis has yet to introduce any unlimited data packages. We see this as industry leaders capitalise on a growing data demand by consumers and also as a marketing means to capture new customers. In 4QFY19, the Big-3 cellcos saw a 4% YoY loss in their total subscriber base and we believe this could likely worsen given the cheaper value proposition offered by U-Mobile (refer to Appendix: Postpaid and Prepaid Statistics in 4Q19)

Radio silence on 5G. The shake up in the ruling coalition appears to have put the initial 5G timeline on hold. We previously anticipated developments on the formation of participating consortiums and bidding for the 3.5GHz to be by late-1Q20, but no further development has been made known. We believe that this may put some risks in the earmarked commercialisation of 5G by 3Q 2020. That being said, the silver lining from a delay is that operators will run in a less pressing capex environment for a few more months. Additionally, we do not anticipate the initial rollout to be nation-wide scale and only focused towards providing enterprise solutions amidst potentially heavy investment pipelines. Hence, the undertaking could lead to more bottom-line pressures in the short-term. With regards to the NFCP, the new Minister of Communications and Multimedia, Datuk Saifuddin Abdullah commented that the previous RM21.6b budget will be maintained. However, the ongoing Covid-19 pandemic is likely to put any deployment of network facilities and infrastructure to a halt until further notice.

Source: Kenanga Research - 1 Apr 2020