MCMC has cancelled the ministerial order on the allocation of the 700MHz spectrum, which was reported by news outlets on 2 June 2020. The first surprise came when MCMC apparently pen the said allocation on 15 May 2020 without undergoing a due public tender process. By way, the opted distribution was 10MHz x 2 each given to AXIATA’s Celcom, DIGI and MAXIS and 5MHz x 2 eachto TM and surprisingly,unlisted Altel Communications. The aboveallocations could haveotherwisederailed the previous vision to establish a consortium to manage the national 5G deployment. No details were made known about the costs involved with the distribution of thefrequencies. That said,suchimbroglio could delay the national 5G deployment even further, possibly until 2021 by our estimates. On the flipside, this could also delay the capex stress which the winning telcos have to bear in rollingout the networks. We maintain ourNEUTRAL call on the sector, anticipating socioeconomic challenges posed by the Covid-19 pandemic and movement control orders to weigh down on listed playersfor this year. That said, we believe the long-term prospect of the sector will be supported by the essentiality of telecommunication services. Given recent share price movements, we take this opportunity to de-rate MAXIS (TP: RM4.90) to UP from MP, and OCK (TP: RM0.630) to MP from OP.

Double one eighties. Yesterday, MCMC cancelled the ministerial order on the allocation of the 700MHz spectrum band which was allocated without undergoing the usual tender procedures on 15 May 2020, while also escaping public notice from the lack of an official statement. This move came to light when it was picked up by news outlets on 2 June 2020. The distribution would have otherwise been by blocks of 10MHz x 2 each to AXIATA’s Celcom, DIGI and MAXIS and 5MHz x 2 each to TM and Altel Communications, an unlisted company. The emergenceof Altel was a surprise to us, as we would have placed our bets on U Mobile if individual allocation was to be offered, with it being the fourth largest celco operator. Furthermore, spectrum costs were not made known despite being a material component in the award of new frequencies. In addition, the move skews away from the formation of a 5G consortium which was intended to reduce individual pains from bearing the spectrum prices as well as to minimise capex spending in rolling out our national 5G network.

More studies needed? This spectrum award cancellation was accompanied by the cancellation and inquiry of specific use in the 700MHz, 900MHz and 2600MHz frequencies. Captioned to increase transparency and to restudy the spectrum uses, we find thismovealso surprising as this could pave the way to another re-farming of these frequencies. Currently, the 900MHz frequency is utilised by Celcom, Digi, Maxis and U Mobile for 4G/LTE services and is paired with the 1800MHz band since July 2017 for 15 years expiry till 2032. Meanwhile, the 2600MHz spectrum has been part of a public inquiry conducted by the MCMC in September 2019; hence, its feature might be less alarming to the industry.

Business as usual for now, but plans have been stirred. Retracting the 700MHz spectrum assignment would for now return the industry to the drawing board in the deployment of the national 5G network. Whether a consortium or individual telcos, the awardee(s) would have to bear the brunt of spectrum costs and incur higher capex spending to build the necessary infrastructure for the new network. We also continue to believe that the return on investments on running the 5G network could be limited in the near-term, only seeing enterprise adoption as commercial demand could be limited by the narrow network coverage and the affordability of 5G device and subscription plans. Though by the looks of things, we would not be surprised if the readiness and commercialisation of the network are delayed towards 2021 (from the initial 3QCY20 target). That said, the deferment of the timeline could be partly faulted on the Covid-19 pandemic and movement control orders.

NEUTRAL view maintained. Our call on the sector remains NEUTRAL as the socioeconomic implications caused by the Covid-19 pandemic and said movement control orders could strain the near-term performance of market leaders. Risks include the possibilities of: (i) loss of income from certain customers that 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 with SME closures. That said, 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. Given recent uptrend movements in respective share prices, we take this opportunity to revise our ratings for: (i) MAXIS (TP: RM4.90) to Underperform from Market Perform, as near-term risks could be under-discounted at current level; and (ii) OCK (TP: RM0.630) to Market Perform from Outperform, as its positive factor of having a high recurring income base could have already been accounted for.

Source: Kenanga Research - 4 Jun 2020