Since our downgrades on MNOs in November, we believe the market has priced in the recent developments. YES is the first in Malaysia to offer 5G. However, with limited compatible devices and limited 5G coverage, we do not think it will be a threat to the large MNOs. Contrary to our initial assumption, the large MNOs are not in a rush to sign up for DNB’s 5G SWN, as they prefer certainty on pricing and quality of service, which in turn provide MNOs certainty on their service quality to subscribers. Negotiations between MNOs, DNB and MCMC are ongoing, aiming for an agreement in 1QFY22, though with real risks of further delays. We maintain NEUTRAL on the telcos, upgrade DIGI and MAXIS from UP to MP following their share price correction, and favor AXIATA as our sector favorite, as we prefer its exposure to regional markets (providing hedge against negative news flow in Malaysia), edotco’s growth, and its digital businesses.

3QFY21 mostly within. DIGI, MAXIS and TM's 3QFY21 results met expectations. AXIATA beat our estimates on lower-than-expected operating and D&A expenses. OCK came below expectations on higher-than-expected costs across the board, delivering weaker-than-expected earnings. Looking ahead, we expect a gradual recovery in prepaid subs on the return of migrant subs. Postpaid ARPU will likely continue to decline on popularity of entry-level packages. Home fibre ARPU will likely continue to decline as fixed telcos continue their expansion into the mass market.

Malaysia a regional laggard in 5G, but it's finally here. Compared to regional peers in South-East and East Asia, Malaysia is a laggard in the 5G rollout, with most regional economies having already launched 5G in 2019 and 2020. That said, YES and unifi mobile last week became the first two operators to sign on to DNB's single wholesale network, with YES now advertising its 5G package as Malaysia's first. Despite unifi and YES making the first move, the large MNOs (Celcom, Digi, Maxis and Umobile) are not in a rush to jump onto DNB's single wholesale network (SWN).

YES' 5G is not a threat to incumbents. Contrary to our initial assumption that unifi and YES' first move will start the clock ticking for the large MNOs, our recent channel checks found that the MNOs do not feel pressured. We believe the large MNOs aren’t in a rush to sign onto the SWN for two reasons. One, lack of pricing and service level agreements. Both the pricing and service level agreements are still being negotiated between the telcos and DNB, and also pending MCMC’s approval. Without quality of service (QoS) guarantee in a service level agreement, we suspect the MNOs are concerned that potentially poor 5G connections at the start (which would be from SWN's network) could fall short of telcos’ QoS promises. Two, the poor coverage in the initial phase of the network poses a risk to the MNOs' reputation, especially on quality of service, as they are careful to not charge subscribers for service on a network over which they have little control.

Negotiations still on-going, potentially more delays. While said concerns are being discussed between DNB and the MNOs, we gathered that DNB has been increasingly accommodating with the MNOs' requests. While there's hope that the relevant parties (MNOs, DNB and MCMC) could reach a common ground and sign agreements in 1QCY22, we remain cautious and believe there may be further delays.

5G adoption in Malaysia will likely be slow, for two reasons, in our view. One, only ~10% of total mobile subs use unifi mobile and YES, with little incentive for other users to switch over given users’ expectations of patchy 5G connections. That said, we foresee minimal churn in the coming months if unifi mobile and YES remain as the only two operators with 5G services. Two, not all 5G devices are compatible. Certain phones, namely the popular Apple iPhones, are not yet compatible with DNB's 5G network, as there needs to be device certification and software update from the device manufacturers to enable connection to DNB's 5G network.

Remain NEUTRAL on the telcos. Following DIGI and MAXIS' share price correction since our 15-Nov downgrade, we upgrade DIGI (TP: RM3.80) and MAXIS (TP: RM4.00) to MP from UP. Note that currently, MAXIS trades at 10.4x EV/FY22E EBITDA, below 2SD of its 5-year mean, and DIGI trades near the 9.5x EV/FY22E EBITDA that we ascribed, also below 2SD of its 5-year mean. We believe the market has priced in recent negative developments. Despite the potential weigh from its Celcom Digi component, we favor Axiata (OP; TP: RM4.30) for its favorable long-term prospects from its regional exposure, future edotco IPO (despite no timeline guidance from its CEO), and digital businesses. We maintain our OP call on TM (TP: RM7.00) as we continue to like the tailwinds behind its various business segments. We maintain MP on OCK (TP: RM0.50) until we see improved profitability.

Source: Kenanga Research - 24 Dec 2021