We downgrade our sector call from OVERWEIGHT to NEUTRAL. Despite the perceived resiliency of the telecommunication sector, theon-goingCovid-19 pandemichas revealed a dent in the armourwith market leaders withdrawing their guidance for the year post-1QFY20 results.We see business risks such as: (i) loss of income from certain customers that could dilute ARPUs, (ii) subscribers down-trading to cheaper optionsofferedby competitors,(iii) collection issues with enterprise customers seeking deferment,and/or (iv) loss of affected enterprise customers all together.Meanwhile, the NFCPand 5G rolloutcould see some delays in timeline given the prolonged movement control order, coupledwithuncertainties if the MCMC could revise some of its agendas (i.e.entry-level fixed broadband package at 1% of GNI).That said, while we do not believe the market will be underweighting the telcos soon, any weakness could be a buying opportunity on the grounds of long-term business sustainability. Post-results, OCK (OP; TP: RM0.630) remains as our sole Outperform premised on its high recurring revenue mix (65-70%) while potential materialisation of its spin-off aspirations could lead to positive kneejerk buying reactions. Investors mandated to stay invested could take a bet on TM’s (MP; TP: RM4.20) possible re-rating from its re admission intotheFBMKLCI constituentlistand DIGI (MP; TP: RM4.65) for its highest dividend yield (c.4%).

Some hits, some misses in 1QFY20 results. DIGI, MAXIS and OCK performed within expectations, but AXIATA and TM missed estimates. AXIATA’s poorer set of numbers came from the wider-than expected drag from its digital segments which will likely persist with the ongoing Covid-19 pandemic. Meanwhile, TM’s greater-than-expected decline in revenue was under-accounted for by us, translating to weaker earnings delivery.

Withdrawal in guidance alarming? From earlier FY20 guidance, only DIGI and TM provided lower revenue guidance with DIGI also anticipating EBITDA to be lower. The decision for telco leaders to withdraw their guidance could insinuate that market conditions have been drastically altered with the Covid-19 pandemic spurring movement control orders (MCO) which extended from a mere two weeks to over two months (refer to overleaf for the Compiled pre- 1QFY20 Guidance). The consequent slowdown to economic activity had raised a whole slew of socio-economic complications. As the corporate sector seek to evaluate present conditions, which we surmised several concerns could arise, such as: (i) loss of income from certain customers could dilute ARPUs, (ii) subscribers down-trading to cheaper options offered by competitors, (iii) collection issues with enterprise customers seeking deferment; and/or (iv) loss of affected enterprise customers all together. As part of the economic relief initiatives amidst the MCO, operators have chipped in to provide free mobile data (1GB/day on specified hours) and video content. Though praised for the contributions, this could lead to a temporary dip in ARPU (mainly Prepaid) as consumers have leeway to spend less. ARPU aside, we do not see subscriber losses to be a long-term issue as customers usually migrate around market offeringsand device-bundles are usually a strategy to keep newer customers sticky (refer to overleaf for the Postpaid and Prepaid Statistics in 1Q20 and commentary).

NFCP, 5G seemingly on pause. With players themselves having difficulty with installation and expansion works, limiting to infrastructure maintenances, it is likely that network expansion goals driven by the NFCP are also on hold. Additionally, it is uncertain if the MCMC could be revisiting its agenda for players to offer entry-level fixed broadband packages at 1% of GNI by 2020 (c.RM40/mth). Questions on this arise as operators are facing strains from the MCO-induced economic slowdown and also if the timing to introduce such measures could be feasible at this juncture. On top of that, the lack of announcement on the 5G spectrum allocation to participants/consortiums seems to certainly nail the delay of its targeted 3QFY20 commercialisation. Earlier this year, the 3.5GHz spectrum was earmarked to be allocated by 1QFY20. That said, we do not anticipate its eventual initial roll-out to be a nationwide affair, but instead would only be focused on providing enterprise solutions, amidst potentially heavy investment pipelines in activating the necessary infrastructure.

Being invested in a NEUTRAL sector. We downgrade our sector to NEUTRAL from OVERWEIGHT as most of our coverages have Market Perform call post-1QFY20 results, adjusting for share price recovery and/or earnings revisions. Given its highly essential nature, telcos will continue to be perceived to possess long-term sustainability and as a supplement to economic recovery in the medium-term. We believe these hiccups will be contained within this financial year, unless the pandemic worsens. That said, investors can still keep a close eye on certain counters such as TM (MP, TP: RM4.20) as its likely re-admission into the FBMKLCI could spur a short-term positive re-rating for the stock. Additionally, DIGI (MP, TP: RM4.65) commands the highest yield (4%) in the sector, which could be of interest to dividend seekers. Its ROE also stands tall at above 200%. OCK (OP, TP: RM0.630) could also be a resilient pick given its high recurring income mix (65-70%) with talks of a potential spin-off looking to unlock some shareholders value should it materialise. Although, the stock could be limited by its small cap and non-shariah status.

Source: Kenanga Research - 1 Jun 2020