No change to our NEUTRAL call for the sector. The recent announcement on the SWN model reinforces our view of lingering challenges ahead in rolling out the 5G network. Further negotiation among the MNOs, DNB and MCMC and the equity participation in DNB is a positive surprise but we still see further challenges ahead in satisfying all stakeholders, creating real risks of further delays. We maintain NEUTRAL on the telcos, but upgrade OCK’s MP to OP following its share price correction, and pick 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.

4QCY21 results season saw AXIATA and TM beating our expectations while DIGI and OCK met expectations. The only dampener was MAXIS which fell short of our expectation due to higher-than-expected device costs but revenue was line with projection. Both AXIATA and TM’s outperformance were mainly due to lower-than-expected costs as revenues were in line. No change to our FY22E earnings as we expect sustained growth albeit at slower momentum given the full reopening of the economy as previously home-bound users start to return to the office. Postpaid ARPU will likely continue to decline on popularity of entry-level packages. Home Fibre ARPU will also likely continue to decline as fixed telcos continue their expansion into the mass market.

Single Wholesale Network. The recent announcement of the preference for a Single Wholesale Network (SWN) by Digital Nasional Berhad (DNB) is a no brainer as we had earlier opined the government will maintain the SWN model - we shared the view that the cancellation of the SWN could bring severe risks and repercussions such as; (i) induce early-termination payments, (ii) adversely impact FDI inflow into Malaysia due to a loss of confidence, (iii) delay in 5G network rollout, and (iv) widen the urban rural digital divide. The accorded equity participation (of 70% in DNB), looks like prompting the large MNOs (Celcom, Digi, Maxis and Umobile) fully into DNB’s SWN model although the equity divestment is still not clear (indication by end of June 2022). This equity participation looks more a goodwill gesture to the MNOs in exchange for supporting DNB’s SWN, acquiescing to the industry’s request for greater inclusion in Malaysia’s 5G roll-out.

MNOs still vigilant on the 5G plan. We opined that the MNOs are still not pressurised to roll out 5G services soon despite this latest development and will still approach this SWN model with vigilance due to a couple of 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 have to be prudent in charging subscribers for services on a network over which they have little control.

Potentially further delays. While the said concerns are being discussed between DNB and the MNOs, we are mildly positive that DNB has been increasingly accommodating with the MNOs' requests i.e. equity participation in DNB. While there's hope that the relevant parties (MNOs, DNB and MCMC) could reach a common ground and agreements that are satisfactory for all parties by June 2022, we remain cautious and believe there may be further delays.

5G adoption in Malaysia will likely be slow in our view, for two reasons. One, only ~10% of total mobile subs use Unifi mobile and YES, (the first local movers into the 5G spectrum) 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.

Moving ahead, we make no changes to our FY22E earnings for AXIATA and OCK but lower Digi’s (on account for the one-off Prosperity Tax and revised upwards TM’s FY22E earnings by 2% on account of slightly higher EBIT as guided by management. No change in our valuations for all - AXIATA (OP; TP: RM4.30), DIGI (MP; TP: RM3.80), MAXIS (MP; TP: RM4.0), OCK (OP; TP: RM0.50) and TM (OP: TP: RM7.00) but OCK is upgraded to OUTPERFORM - our DCF-TP implies an FY22 EV/EBITDA of 6.8x, at its 3-year mean. Its current share price of RM0.40 implies an FY22 EV/EBITDA of 6x, at -2SD of its 3-year mean, which we think undervalues the company. Our TP for TM implies an EV/FY22 EBITDA of 6.6x, close to +0.5SD of its 5-year mean, which we think is justified given the tailwinds behind TM’s numerous business segments. AXIATA has a lot going for it, in its regional and digital businesses, making the stock a good hedge against the uncertain operating environment for local MNOs and has the best long-term value proposition against industry peers. Trading at RM4.30, the share price implies a FY22 EV/EBITDA of 5.40x. Bottoming out at its 5- year mean and undervalued, we reiterate OP for AXIATA which is also our Top Pick.

Source: Kenanga Research - 5 Apr 2022