We maintain our NEUTRAL ratingon the telecommunications sector. In conjunction with the JENDELA initiative, telcos will fretthe retirement of all 3G networks by end-2021.That said, payoff is expected by way of more efficient management of remaining infrastructures to ensure optimal network quality. Possibly, 3G spectrums could be later used to boost 4G capabilityto accelerate JENDELA’sconnectivity targets. Moving further ahead, it is hoped that we will have a strong enough backboneinfrastructureto introduce thenational 5G network post-2022. In the cellcosspace, we anticipatecoming quarters to see fewer further downside pressure onARPUs (mainly Prepaid) as consumers become desensitised by the availability of “unlimited”data plans while we also expect some uplift in total subscribers asaffordability concerns progressively wane away. We highlight AXIATA (OP; TP: RM4.30) as our top pick for the quarter. Thanks to the group’s wide regional exposure and non-mobile businesses, we anticipate knee-jerk reactions on positive developments(i.e. potential consolidation in Indonesia, digital assets becoming more sustainable, strong regional recoveries). The group’s outlined 5-year plan might also attract investors witha longer term approach. Inthe meantime, we de-rate our call for DIGI (TP: RM4.25) and TM (TP: RM5.30) to MARKET PERFORM from OUTPERFORM as they have performed well following our earlier recommendations.

3QFY20 results came with ups and downs. For the3QCY20 reporting season, only MAXIS demonstrated performance that was within our expectation. AXIATA and TM sprung positive surprises while DIGI and OCK missed their marks. Disappointments arose mainly from overly optimistic revenue recovery expectation. On the flipside, unexpected gains were made mostly from better cost management to navigate around these unprecedented times. Going into the 4QFY20 reporting season, we are hopeful that top-line factors will enjoy some positive traction as consumer spending improves with some help from looser movement controls possibly driving data needs. That said, there could be some pressures on the operational front as capex roll-outs are ramped up to cope with the resultant growing data needs.

Phase 1 in action. Telcos will be kept busy in 2021 with Phase 1 of JENDELA, mainly in preparation for the shutdown of the national 3G network. This may meanaccelerateddepreciation of3G assets during 2HFY21 but could be seen as a necessary industry one-off expense. The then available 900MHz and 2100MHz bands could also be used to relieve network capacity and aid in boosting 4G coverage, though MCMC is urging telcos to achieve the Phase 1 targets by optimising the remaining 2G and 4G infrastructures and via investments into efficiencies, before counting on further spectrum allocation. Management guidance indicate that capex spends are well contained and should not stress cash flows in the near term. To recap, these targets include: (i) improving 4G coverage from 91.8% to 96.9% in populated areas,(ii) increasing mobile broadband speeds from 25Mbps to 35Mbps, and (iii) expanding fibre broadband access to 7.5m premises.

Subscriber stats could see an uplift. ARPUs during the 3QFY20 quarterremained flat as the economy and consumer spending lingered at a slower pace with movement controls still in place, albeit more relaxed than in 2QFY20. We believe that the overall increase in activity should translate into more meaningful ARPU numbers, as more consumers’ outdoor movement could lead to less indoor/broadband dependency for data needs. This could also reflect positively towards subscriber numbers but possibly still leaning to the Prepaid segment as “unlimited” data plans have developed a following, which we believe could lose its lustre as affordability concerns wane away. In terms of the Big-3 cellcos, Maxis remains the leader in the Postpaid market (39% subscriber share) while DIGI keeps a strong hold in the Prepaid front (40% subscriber share) (refer to Appendix: 3Q20 Postpaid and Prepaid Statistics).

We maintain NEUTRAL on the telecommunications sector. As the industry works towards a leaner operating model with more optimised use of resources, investments and efforts in the near-term might not assure investors on potential rewards until further down the road. Henceforth, we believe investment interest might be muted for the time being as investors focus on more robust plays at least for the coming quarter. For top picks, we chose AXIATA (OP; TP: RM4.30) as its wider exposures provide more exciting prospects (i.e. Indonesia’s omnibus law opening opportunities for consolidation, digital assets heading towards a turnaround, fresh injection of funds in its Bangladeshiunit Robi’s IPO potentially accelerating penetration rate). Adding to this, in its recently announced 5-year plan, the group has strategies in place to drastically drive down its cost/GB and targets to achieve group-wide EBIT margins of 20% (14.4% in FY19). Overall, this should translate to better free cash flows to allow for more generous dividend payments (FY25E target of 20.0 sen, from historical average of 8.0-10.0 sen). In the meantime, we de-rate our call for DIGI (TP: RM4.25) and TM (TP: RM5.30) to MARKET PERFORM from OUTPERFORM as they have performed well following our earlier recommendations.

Source: Kenanga Research - 6 Jan 2021