Maintain NEUTRAL on the telecommunications sector. Celcom, Digi and Maxis have signed a 20-year agreement to collaborate in developing and sharing fibre infrastructure. We were not surprised as the agreement which: (i) reduces capex requirements and expands the fibre reach for each mobile network operator (MNO), and (ii) avoids duplication of assets, is a follow-up on a MoU signed a year ago. Despite the potential capex reduction and wider coverage for the MNOs, anticipated continued stiff competition in the mobile space could continue to weigh on their service revenues. While industry consolidation, namely between Digi and Axiata, may be on the table, impediments still linger. We make no changes to our calls and maintain MP for Maxis, Digi and OCK. Maintain OP for TM (TP: RM6.85) on long-term growth prospects from its cloud and data segments. Our top pick is still AXIATA (OP; TP: RM4.40) on continued recovery from regional OpCos.

Joint fibre rollout and sharing. Celcom, Digi and Maxis (MNOs) have signed a 20- year agreement to collaborate in developing and sharing fibre infrastructure. Specifically, they look to improve the fibre backhaul to complement existing microwave technology. The main purpose is to allow the industry to extend its 4G mobile backhaul to support 5G new sites and Fibre-to-the-Home (FTTH) expansion. This announcement was expected as the three MNOs have signed a MoU a year ago to explore ways for more efficient fibre rollout.

No surprise. We were not surprised as it is common for MNOs to share infrastructure. In fact, the trio has been sharing fibre cable since 2010. It does not make economic sense for each MNO to roll out their own fibre-cables and compete as that will: (i) compel each MNO to incur higher capex, weighing on returns, and (ii) cause duplication of assets and inefficient use of the network as there will be excess capacity in each network. Furthermore, we see this collaboration as a step towards achieving the JENDELA connectivity goals as the cost-sharing arrangement allows the MNOs to expand fibre into less-profitable rural areas. The rollout of more fibre network is also necessary for Malaysia’s 5G rollout, as this infrastructure is necessary to speedily handle large amounts of data from both subscribers and IoT devices. While the 5G spectrum has been handed to the MoFowned SPV Digital Nasional Berhad, it would still require the expertise and capex of MNOs to roll out the necessary infrastructure.

Some benefits… We see this collaboration panning out in one of three possible scenarios. One, the MNOs could collectively lower capex and jointly invest and share assets that might otherwise be duplicated. Two, the MNOs continue with the initial capex, but invest in different areas, thus collectively having 3x the coverage with their combined fibre networks. Three, they might marginally reduce their capex and expand into unique areas for greater coverage. Regardless of which pans out, the MNOs stand to benefit from lower costs and/or wider fibre coverage. We like that they are collaborating, as this not only makes financial and operational sense for the MNOs, but it is also beneficial to society, as it means (i) greater access to cheaper fibre connectivity, and (ii) efficient use of resources. In an alternative scenario with no fibre sharing, we believe that each MNO could be burdened with large capex and have excess network capacity.

…but weighed by stiff competition. We believe that DNB ownership of the 5G spectrum and continued sharing of backhaul infrastructure could continue to cause further price competition among the MNOs, as they will essentially be offering similarquality 5G services, leaving them to compete on price and service. Moreover, by tapping into the shared 5G capacity, MVNOs could exacerbate the already-fierce price competition in mobile offerings.

Digi and Celcom back on the deal table? With the forthcoming stiff competitive mobile space, we would not be surprised should M&A activity emerge in the industry to consolidate infrastructure and subscriber base, as well as to save costs through synergies. There have been rumors about Digi’s parent Telenor and Celcom Axiata reigniting discussions of a possible merger. While a merger may bring strategic benefits, we believe that the reasons for the failed discussions, which include: (i) “complexities” across 14 entities and 9 regions, (ii) disagreement in equity share, and (iii) relocation of combined entity from Malaysia to Singapore, may continue to prevent the deal from going through.

Maintain NEUTRAL on the sector. The collaboration did not come as a surprise, but we like the collaboration as it prevents duplicating capex and infrastructure. While the MNOs could benefit from reduced capex, continued price competition in mobile offerings, particularly if network quality is similar, could weigh on profitability. Thus, this news does not affect our existing calls. We keep our MP call for Maxis, Digi and OCK. Our top pick continues to be AXIATA (OP; TP: RM4.40) for its: (i) encouraging recovery of regional OpCos, (ii) cost-cutting measures, and (iii) high-dividend goal. We maintain our OP call on TM (TP: RM6.85) for long-term prospects of its cloud and data center segments. We do not believe that this collaboration is a threat to TM’s fibre assets as the MNOs are likely to roll out fibre in areas without fibre, in our view, as the aim is to avoid duplication of fibre infrastructure after all.

Source: Kenanga Research - 19 Mar 2021