Budget 2022 has a neutral impact on the telcos. The incremental device cost to supply B40 students, in collaboration with the government, with a tablet is insignificant. Plans to bridge the digital divide are already being done through the JENDELA program, and the national 5G rollout aspirations are already widely known. In light of the one-off Cukai Makmur tax, we lower our FY22E EPS by between 5% and 10%, and have reduced FY22E DPS for DIGI, MAXIS and TM. In light of the rakyat-centric Budget 2022, we note that the telcos have been playing their part to help the rakyat, and we foresee them to continue doing so going into 2022. All eyes are on the DNB’s 5G wholesale rates, which should lead to a MSAP that will lead to 5G consumer prices that are not higher than those of 4G’s. Despite Astro and UMobile recently venturing into providing home internet, we are unperturbed on any intensifying competition as the national fixed broadband penetration only stands at 41% as of end-2QCY21. All in, accounting for Budget 2022 and current industry developments, we maintain our NEUTRAL view on the telco sector, and TM as our top pick.

Budget 2022 - Neutral impact on telcos. In the rakyat-centric Budget 2022, the points pertinent to telcos include:

• Government's collaboration with selected telcos to supply tablets to all B40 students in institutions of higher learning. Government to allocate RM450m, and telcos to commit RM65m.
• Government to provide RM700m to continue digital connectivity efforts in 47 industrial areas and 630 schools, especially those in rural areas.
• Government to allocate RM30m to provide internet facilities in 40 existing PPRs.
• In 2022, 5G services to cover 36% of high-density areas in Johor, Selangor, Penang, Sabah and Sarawak.

In our view, these measures have an immaterial impact on the telcos. Assuming that the RM65m is divided among Celcom, Digi, Maxis and TM, the additionaldevice cost is <2% of their average annual device costs, making it an insignificant sum. Moreover, the incremental government spending on digital connectivity efforts is unlikely to trickle down to the telcos' P&L. We were not surprised by lack of measures for connectivity matters in this Budget because the steps to bridge the digital divide have already been outlined in the JENDELA program, while the 5G rollout preparations are already underway, with the aspirations already previously announced by DNB (refer to Table 1). Note that Jaringan Prihatin (a Budget 2021 initiative) has helped with the postpaid subs growth (mainly among the B40 community), as well as greater device sales, which grew >40% YTD for some telcos. The program has also facilitated the 3G-to-4G migration, which is largely on track.

Lower FY22E EPS and DPS on Cukai Makmur tax.The additional 9% tax imposed on chargeable income exceeding RM100m will impact the large cap telcos under our coverage. We estimate that the tax will reduce Digi and Maxis' FY22E EPS by 10% each, TM's FY22E EPS by 9%, and Axiata's FY22E EPS by 5%, as we estimate that ~55% of earnings are derived from Malaysia. Based on the reduced earnings, with regards to FY22E DPS, we:

1. Reduce MAXIS' from 18.0 sen to 16.0 sen, to achieve a payout of 100% of its PAT in FY22 is unlikely, on prudent cash management;
2. Reduce DIGI's from 15.4 sen to 13.7 sen, on our 99% payout assumption, based on its near-100% payout policy;
3. Reduce TM's from 17.5 sen to 17.0 sen, to stay within its policy limit of 60% of PATAMI; and
4. Maintain AXIATA's 10.0 sen, which implies a comfortable 82% payout ratio (historical range of 50-91%)

Pro-forma, Celcom Digi's FY22E fully-diluted EPS would be cut by 10% and fully-diluted DPS also down 10% from 15.1 sen to 13.6 sen. However, we maintain Axiata's FY22E DPS of 10.0 sen, as it strives towards its 20.0 sen DPS aspiration by 2024, even if this entails a higher payout ratio. OCK is spared from this because its FY22E PBT is less than RM100m.

(Refer overleaf for more on JENDELA, 5G, and the fixed broadband market)

Maintain NEUTRAL on telcos. The one-off prosperity tax in FY22 does not impact our 10-year DCF and EV/EBITDA valuations. In our view, any fundamental impact from Budget 2022 measures will be muted. We maintain our OP call on Axiata (TP: RM4.45), which is relatively less affected by the tax than its peers. We continue to favor TM (OP; TP: RM7.00), as we think they will continue to benefit from having the necessary infrastructure and assets for 5G and greater home fibre adoption.

Telcos have been pulling their weight for the rakyat, these social considerations being delivered without compromising their profit objectives would help raise the sector’s ESG credentials. While the Communications and Multimedia Minister, Tan Sri Annuar Musa, has stressed that the telcos should not only focus on profits, but also on the quality of services in rural areas, we note that the telcos have been pulling their weight. In 3QCY21, network and connectivity related complaints have reduced substantially, and anecdotally, the telcos have been fast to respond problems and downtime. Not to mention, the telcos have continued to provide 1GB in free data for online education and productivity, an initiative that has been repeatedly extended since its inception in April 2020. During recent discussions, MCMC's chairman Dr. Fadhlullah has also praised the telcos for accommodating users' growing data consumption without hiking prices. While we earlier expected this to cause a temporary dip in ARPU (mainly Prepaid), prepaid ARPU remained relatively stable throughout the period, with blended Prepaid ARPU ranging between RM33/mth to RM34/mth. Looking ahead, we believe data yields will continue to fall as data consumption will continue to grow, while political and competitive pressures continue to prevent meaningful price hikes. With Jendela Phase 1 targets to be met by end-2022, the telcos still have more work ahead, namely: (i) ~1mil more premises to be passed to 7.5m premises, (ii) +4Mbps in mobile broadband speeds to 35Mbps, and (iii) ~3% increase in 4G coverage to 96.9%. (Refer Exhibit 1)

5G wholesale rate. All eyes are currently on DNB's 5G wholesale rate, which is currently being negotiated between the telcos and DNB, and evaluated by MCMC. According to MCMC's Dr. Fadhlullah, the MSAP between DNB and telcos should ensure that retail customers will not pay more for 5G (in Mbps) than what they are already paying for 4G.

More entrants to the fixed space. As demand for home internet remains strong, Astro and Umobile have recently ventured into the space, with the former offering its own internet services, and the latter offering its first home fibre product in earlySept. As Umobile, which is currently relying on Allo's fibre infrastructure, looks to widen its fixed coverage to more areas, we wouldn't be surprised of future partnerships with TM Wholesale. Given that Malaysia's fixed broadband penetration stands at 41% in 2QCY21 (39% in 1QCY21), we are not concerned about competition in the space. However, the telcos will likely see fixed ARPU dilution moving forward, as their continued expansion into the mass market will outweigh any ARPU gains from package upgrades. Encouragingly, MCMC recently indicated that they think fixed broadband prices in Malaysia are affordable relative to regional peers, thus reducing price downside risks to wholesale provider TM.

Source: Kenanga Research - 1 Nov 2021