Maintain NEUTRAL on the telecommunications sector. We expect the Big 3 to continue regaining postpaid market share, albeit to the detriment of their ARPUs. Moving forward, telcos will look to drive growth through the enterprise and FTTH segments. We foresee Celcom Digi Berhad (CDB) to achieve revenue synergies in FY24 at the earliest, as it needs to: (i) consolidate networks and operations, and (ii) devise an effective dual-brand strategy. We estimate 5% net savings in FY22, as transition costs may weigh on cost savings. Our top pick is TM (OP; TP: RM7.00), driven by: (i) net unifi subs adds, (ii) growth in CDN and IRU, and (iii) wholesale leasing its fibre assets for 5G rollout and other’s FTTH offerings. Maintain OP on AXIATA (TP: RM4.45) as we believe the current valuation does not fully account for the value accretion from CDB. Maintain OP on OCK (TP: RM0.59). Maintain MP on MAXIS (lower TP of RM4.70 from RM4.90) and MP on DIGI (post-merger-TP: RM4.25).

1QFY21 as expected. The telcos' 1QFY21 performance came within our expectations, save for DIGI which exceeded our overly pessimistic estimates. On the postpaid front, the Big 3 continued regaining market share (74% vs. trough of 70% in 4QFY19) at the expense of declining postpaid ARPUs. On the prepaid front, they continued to make new record lows in market share (1QFY21: 62.1%) but ARPUs remain stable. Overall, competition continued to weigh as mobilecellular penetration remained high at 135.7%.

Expect further ARPU declines. Moving forward, we expect mobile competition to remain stiff, driven by: (i) other MNOs and MVNOs getting more spectrum, and (ii) regulatory and political desire for low-priced mobile connectivity for the Rakyat. In the near term, we expect: (i) gradual recovery in the Big-3's postpaid market share as entry-level postpaid plans continue to gain traction in favor of their reputable service quality, albeit at the expense of lower ARPUs arising from the said stiffer competition, (ii) prepaid ARPU to potentially decline on lower consumer spending in 2QFY21, as tightened movement controls could once again bring up concerns on affordability.

Ramping up enterprise segment. On the enterprise front, the MNOs are going beyond basic connectivity and are increasingly offering digital services (horizontal SaaS) such as web design and cloud applications. While the Big 3 provide similar offerings, we see Maxis as the leader among them as it continues to expand its enterprise team via acquihires. It also leads the Big 3 in terms of enterprise revenue, currently. While some telcos currently offer vertical SaaS (industry-specific LTE/5G use cases), they are still nascent and insignificant in terms of earnings contribution, but we foresee growth in this segment over the longterm as adoption becomes more widespread. For now, we see the biggest winners in the enterprise segment as TM and TIME (non-rated), as their proprietary data centers (DCs) allow them to not only provide in-house cloud capabilities, but also benefit from other telcos' enterprise growth, where greater use of, for example, Google's cloud services means greater reliance on said DCs. All in, we think: (i) horizontal SaaS will experience gradual growth, (ii) vertical SaaS will not meaningfully contribute until FY25, and (iii) TM is the clear winner from businesses' digitalization.

Extended lockdowns benefit FTTH. DIGI and CELCOM are ramping up efforts to provide FTTH services to drive revenue growth, reflected in: (i) CELCOM’s recent wholesale lease agreement with Allo, and (ii) CELCOM and DIGI's greater push of their home bundle products. Although MAXIS is ahead and TM a clear leader, nationwide fixed broadband penetration remains <40%, providing ample room for growth. We think both near and long-term prospects look bright, as working/learning from home and greater data consumption will drive FTTH adoption. That said, we expect FTTH ARPU to gradually decline as telcos expand into low/middle income markets to increase FTTH subs.

Maintain NEUTRAL on the sector with TM as top pick. While the merger will rationalize mobile competition in FY22 and beyond, stiff competition will continue to: (i) decrease Big-3's prepaid market share and (ii) put downward pressure on ARPUs. As the mobile segment’s prospects remain dim, we see FTTH and enterprise segments driving future growth. We continue to favor TM, which we think is poised to: (i) continue its strong net adds in unifi subs, (ii) benefit from growth in CDN and IRU and (iii) benefit from wholesale leasing its fibre assets for 5G rollout and telcos' FTTH offerings. We also maintain OP on AXIATA as we believe the current valuation does not account for the value accretion from CDB. Our conservative dividend estimates also have room for upgrades to be more in-line with management's target of 20.0 sen by FY24. We maintain OP on OCK, premised on: (i) greater demand for sites/towers for 5G networks and (ii) maintenance of more infrastructure, stipulated by JENDELA. We maintain MP on MAXIS with a lower DCF-TP of RM4.70 (from RM4.90) as we trim FY21E/FY22E FCFF by 7%/5% to account for potentially higher-than-expected capex, as MAXIS strives to regain its position as the fastest network in Malaysia, an accolade it recently lost to DIGI. Maintain MP on DIGI as the current price has already priced in CDB's near-term catalysts.

Source: Kenanga Research - 2 Jul 2021