We raise our call for the sector to OVERWEIGHT from NEUTRAL. We believe telcos and investors alike are warming up to the Single Wholesale Network (SWN) model, which they had resisted previously. We believe the steep de-rating of the sector in recent months has adequately reflected the market’s reservation on the model, which means a reversal in share prices, may be on the cards once the dust finally settles. We also see telcos as a service-based industry that is able to maintain their profit margins amidst high inflation by keeping wage pressures at bay. Our top picks within the sector are DIGI (OP; TP: RM3.70) and TM (OP; TP: RM6.70).

Single Wholesale Network is inevitable. The deadline of the Telco’s equity participation in DNB’s is fast approaching and we take the view that the telcos will accept it as they cannot afford to sit out the next big evolution in the digital-based economy driven by the 5G technology and Industrial Revolution 4.0. The remaining question to be answered is the quantum of the equity participation of large MNOs (Celcom, Digi, Maxis and Umobile) in DNB, the holding company for the SWN. We do not rule of the possibility of the large MNOs being granted a greater equity participation in DNB in exchange for their unwavering support for the SWN model

A win-win situation. While concerns have been raised on DNB’s wholesale fixed capacity charges to support its bondraising requirements, we do not expect a material increment in the telcos total outlay to DNB thus cost, funding structure and timeline would probably be revised by the new investors (the MNOs) which could influence DNB’s pricing mechanism, procurement strategies and cost management, benefitting the MNOs in the long run. Furthermore, we believe the commitment by the MNOs to DNB’s equity participation could likely boost DNB’s credit rating in its bond-raising exercise. This is also a win for national interest as it accelerates Malaysia’s IR 4.0 progress, boosted by efficient mobile speeds at affordable tariffs.

OVERWEIGHT. We feel the uncertainties surrounding the 5G rollout have been priced in by the market; thus there will be potential rerating on the sector once the dust finally settles. Our NEUTRAL rating is raised to OVERWEIGHT for the sector. While there are no changes to our FY22E/FY23E earnings, TP are revised down for all to reflect higher cost of debt (on a higher risk-free rate). AXIATA (OP; TP: RM3.45), DIGI (OP; TP: RM3.70), MAXIS (OP; TP: RM3.90), OCK (OP; TP: RM0.45) and TM (OP; TP: RM6.70) are all rated OUTPERFORM with DIGI also raised to OUTPERFORM. The implied FY23 EV/EBITDA multiples of for the TPs are reflected in the table on the next page. Our top picks for the sector are DIGI and TM. We like DIGI for the following reasons: (i) impending merger with Celcom AXIATA, (ii) returning foreign workers will boost its prepaid subscription segment, and (iii) superior EBITDA margins among the telcos. We like TM for its foray into the mass market and it being one of the pioneers in 5G service in Malaysia which should drive its broadband subscriptions.

Source: Kenanga Research - 5 Jul 2022