Maintain NEUTRAL on the telecommunications sector. The MyDigital blueprint includes four salient points: (i) JENDELA - public and private RM21b investments to improve connectivity, (ii) telcos' RM1.65b investments in submarine cable network to boost international connectivity, (iii) government SPV to invest RM15b to own, implement and manage 5G spectrum, and (iv) TM, Microsoft, Google and Amazon selected as Cloud Service Providers (CSPs) to manage and build hyperscale data centres and cloud services for the public sector. Government-SPV ownership of the 5G spectrum came as a surprise, but ensures affordability and timely 5G rollout. We view TM as the main beneficiary through growth in its data segment and leasing of fibre infrastructure for 5G deployment. We increase TM's TP to RM6.95 from RM5.30 but maintain it at MP. AXIATA continues to be our top pick with a TP of RM4.30 and an OP call. Derate OCK from OP to MP following its 18% rally after the launch of MyDigital. Re-rate DIGI (TP: RM3.55) from UP to MP following its recent price correction.

MyDigital Blueprint maps out the government’s aspirations for an inclusive digital economy. Among the initiatives and efforts to be implemented up to 2030, there are four salient points. One, the RM21b JENDELA project to increase and strengthen fibre optic connectivity. The blueprint has increased the number of premises from 7.5m by the end of 2022 to 9m by the end of 2025. We reckon that this would include sparsely populated areas which could have been deemed of a lower priority. Two, several telcos to invest RM1.65b until 2023 in the international submarine cable network and the government to introduce policy to promote investment in submarine cables landing stations to strengthen international connectivity. Three, a government special purpose vehicle (SPV) to invest RM15b to own, implement and manage the 5G spectrum. All licensed telcos will have equal access to the 5G infrastructure. Four, the government has given conditional approvals to four Cloud Service Provider (CSP) companies - Microsoft, Google, Amazon and TM - to manage and build hyperscale data centers and cloud services for the public sector.

5G in Malaysia by end-2021, expedited by SPV. Seeing 5G as key to technological advancement and economic development, the government-owned SPV will expedite 5G roll-out to the end of 2021, faster than JENDELA’s earlier target of late-2022/2023. Promising all telcos equal access to the necessary infrastructure, the government views 5G infrastructure, specifically the spectrum, as a natural monopoly asset, thus believes that it is best managed by the government. In turn, this prevents the duplication of infrastructure among telcos, as well as reduce telcos’ high-cost of investments, which would have caused telcos to delay 5G deployment until it is commercially viable. As the telcos do not have to bear the cost of the spectrum, this could allow them to offer more competitive rates to customers, facilitating faster 5G roll-out. Unlike the traditional model of telcoowned-spectrum, this reduces the opportunities for telcos to differentiate themselves from one another in their 5G offerings while possibly enabling new entrants to tap into the network, laying the grounds for a continued price competition in the mobile space. Note that the RM15b investment budgeted to the SPV over a period of 10 years will likely draw focus to the more densely populated city areas in its early stages, with the goal of having 5G rolled out across all high-density areas by 2023.

TM to benefit from data centre, cloud services, and leasing of fibre network. With the government aspiring to have 80% of public data stored on the Cloud by 2022 and to employ other Cloud services to strengthen government services, TM, as the only home-based CSP, stands to benefit from the public sector’s recurring and growing revenue base. Moreover, the availability of 5G would also speed up adaptation of cloud applications in the private sector, providing potential further catalysts to TM’s data segment. TM’s enterprise and public segment (TM ONE) also yields the highest EBIT margin (YTD 28%) within the Group (YTD 15%). As one of the few telcos with submarine fibre cable infrastructure, TM will likely contribute to the cable network expansion, in our view. Though any additional capex is not yet known, we believe that their cost-optimization efforts should help cushion any additional costs from expedited fibre expansion. Moreover, with TM’s extensive fibre footprint, it is likely to have to lease out its fibre footprint to serve the new network, therefore TM will still play an important role in 5G development.

Maintain NEUTRAL on the sector. The MyDigital blueprint will have a neutral impact on the sector. We pencil in higher growth assumptions for TM’s fixed broadband and data segment, marginally increasing earnings by 4% in FY21 and up to 20% in FY25. Our new assumptions translate to a higher DCF-driven TP of RM6.85 (from RM5.30). Though we maintain our MP call at this juncture given the limited capital upside, we opine that faster-than-expected delivery of the data targets would be a positive rerating factor. Further, we have yet to account for new potential revenue streams in relation to TM leasing out its fibre network, which could be another boon in time to come. Our top pick continues to be AXIATA (TP: RM4.30), as we are positive on the Group’s new 5-year plan with aspirations for greater non-mobile revenue drivers and higher dividends. Following OCK’s 18% rise on the launch of MyDigital, we de-rate our call for OCK (TP: RM0.54) to MP from OP while the military coup in Myanmar may also poses short-term hurdles to their Myanmar tower expansion plans. Following DIGI’s recent price correction, we re-rate DIGI (TP: RM3.55) from UP to MP.

Source: Kenanga Research - 22 Feb 2021