In the coming quarter, the telcos' 5G device offerings and efforts to migrate 3G-only subs onto 4G devices may weigh on EBITDA margins. On the mobile front, competitively priced 5G-device bundles will likely continue to weigh on ARPUs. On the fixed front, we wouldn't be surprised of gradually plateauing fixed subs growth rates. The JENDELA Phase 1 tender winners will be announced soon, as there's still work ahead to achieve the 96.9% coverage and 35Mbps targets by end-2022. There continues to be lingering concerns of Malaysia’s single wholesale network, both in terms of the risks of delayed/inefficient rollout, and in the lack of differentiation among the MNOs. Due to the lack of re-rating catalysts and unexciting dividend yields (2~3%), we maintain our NEUTRAL view on the sector. Maintain OP on TM (TP: RM7.00) on its fibre assets for 5G roll-out and enterprise services, Axiata (TP: RM4.45) on its regional economic recovery and digital services, and OCK (TP: RM0.59) as a beneficiary of JENDELA and the 5G roll-out.

2QFY21 as expected. All the telcos came within expectations. The Big 3 postpaid subs base grew 2% QoQ driven by: (i) the continued popularity of their entry-level packages and (ii) the incentives from the Jaringan Prihatin program; both of which have contributed to the 1% postpaid ARPU erosion. It's likely that the other MNO/MVNOs are continuing to lose postpaid market share on quality concerns. On the prepaid front, DIGI posted its fourth consecutive decline in prepaid subs, likely due to the continued loss of migrant subs and churn to Celcom, which posted its fifth consecutive quarter of prepaid subs growth. TM and Maxis' fixed business performed very well during the quarter, with TM posting yet another quarter of 10% QoQ unifi subs growth. Looking ahead, the aforementioned prepaid/postpaid trends will likely continue into the near future.

3G-4G migration could weigh on EBITDA margins. With the 3G shutdown on track, the network is expected to be phased out by year-end. The MNOs have been busy migrating users with only 3G connectivity to 4G devices via competitively priced 4G device bundle offers. Thus, we expect the higher device costs to weigh on EBITDA margins in 2HFY21. With MCMC recently announcing that (i) 4G coverage in populated areas has reached 94% (vs. the 91.8% at inception) and (ii) average mobile broadband speed has reached 29.14MBps (vs. the 25Mbps at inception), there is still work to be done to achieve the 96.9% and 35MBps targets (by end-2022).

5G. Once DNB's 5G network is operational and telcos offer 5G connectivity, subs will need to upgrade to 5G-ready phones to access the network. While the telcos currently offer a suite of said phones, we believe there'll be competitively-priced 5Gdevice bundles to entice new subscribers, which will add to device costs, further weighing on EBITDA margins. Due to the equal access to DNB's 5G network, we wouldn't discount the possibility of new entrants into the mobile space. However, potential new entrants would have to wait until 5G coverage is more widespread. For their subs to fall back on 4G and 2G networks, the new entrants could strike domestic roaming agreements with existing MNOs. Together, these factors will likely further weigh on ARPUs.

Fixed. After stellar 2QCY21 growth numbers, we believe 3QCY21's subs growth is likely flat/marginally weaker QoQ. At the current rates of lockdowns easing, we expect the telcos to experience a gradual decline in fixed subs growth rates in 4QCY21. TM's latest wholesale agreement with Astro (for Astro to provide home internet for its subs), signals the resilient demand for home broadband. While Astro currently has partnerships with Maxis and Allo to cross-sell products, we believe Astro will seek to offer their own internet services where neither Maxis nor Allo have coverage, so as to avoid cannibalization. We don't see Astro's venture into the fixed space as a competitive threat to the fixed telcos, whose users have come to rely on and trust on for internet connectivity.

Maintain NEURAL on the sector. Against this backdrop and the lack of re-rating catalysts in the near-term, we maintain our neutral view on the sector. Dividend yields of 2-3% are also uninspiring relative to other large caps. However, we continue to like: (i) TM for its ability to benefit from leasing fibre network for the 5G rollout, data centre and cloud services, and growth from the Unifi segment; (ii) Axiata for its exposure to the regional economic recovery, favorable deals in Malaysia and Indonesia, and digital services; and (iii) OCK for being a potential beneficiary of JENDELA and the 5G roll-out.

JENDELA and 5G rollout. Within the next three weeks, the Ministry of Communications and Multimedia will be announcing the winners of the JENDELA Phase 1 tender, with a total tender size of RM4.6b to construct 1,661 towers and install the network and necessary electronics. In this space, we see OCK as a beneficiary, as it could benefit from the construction and management of more telco towers. Given OCK's relationship with Ericsson, we wouldn't be surprised if OCK wins jobs for the 5G network roll-out.

Lingering concerns of a single wholesale network (SWN). We think that there continues to be lingering concerns of network differentiation due to the single wholesale 5G network (SWN) as well as concerns about the risks of a SWN, as historical examples of SWNs in other markets (e.g. Kenya, Russia, and South Africa) point to failed deployments, slow rollout, poor service quality, and profitability challenges. Such negative perception of a SWN may discourage foreign participation in Malaysia’s telco sector in the near term. That said, we believe that the risks of a delayed/inefficient rollout are minimal, given that Digital Nasional Berhad (DNB) has already tasked Ericsson, a reputable global telco with extensive experience, with the rollout. Given the government’s strong desire to bridge the connectivity gap and its strong emphasis on leveraging 5G networks to achieve its Digital Economy aspirations, we believe that the authorities have an incentive to ensure good service quality.

Source: Kenanga Research - 4 Oct 2021