Telecommunications

2QCY22 Results Review: Perfect Scorers

We maintain our OVERWEIGHT rating on the telecommunications sector as we believe the market has already priced in a 5G model that is less favourable to telco operators. The just concluded 2QCY22 results season saw all stocks under our telco universe meeting expectations, which was unchanged from the previous reporting season. Broadly, all the telcos saw improvement in subscription, both locally and regionally. Their blended ARPU rebounded after having come under tremendous pressure for quarters prior. These trends look likely to sustain into 2HCY22 as economies reopen and the pandemic moves towards an end. An improved nationwide 4G coverage under the Jendela Initiative and the 5G rollout will take the role of telecommunications in everyday life and business to a whole new level, laying the foundation for long-term growth for the industry. We raised our TP for AXIATA (RM3.65), DIGI (RM4.25), OCK (RM0.95) and TM (RM7.95) as we rationalised our valuation basis to EV/EBITDA. Our top picks are AXIATA, DIGI and TM.

Telcos did it again. The just concluded 2QCY22 results season saw all stocks under our telco universe meeting expectations, which was unchanged from the last reporting season.The reopening of the economy at home and regionally saw continued demand for telecommunications as consumers move forward from the pandemic. The telcos as a whole saw commendable growth for 1HCY22 with topline posting a 5% YoY uptick with CNP ending higher 6% YoY on account of a strong EBITDA (1HCY22: 7% YoY) mostly coming in the 2Q. AXIATA saw a 6% topline uptick on generally strong all-round performance from its operating companies with the exception of Dialog (Sri Lanka) and Ncell (Nepal) but earnings surged 35% on strong contribution from Celcom, edoctco and Smart (Cambodia). Only DIGI and MAXIS saw downside pressure on earnings in 1HCY22 declining 17% and 12%, respectively, on account of soft EBITDA and deferred tax (Digi). Subscribers growth saw improvements YoY and QoQ, both regionally and domestically. AXIATA subscription was boosted by double-digit accretion by Dialog with Celcom which came in at 3% YoY. Local subscriptions were led by TM which saw 19% YoY growth on strong promotion and the promise of 5G services or broadband services. Blended ARPU was mixed with all players (local and regional) saw decline with exception of XL AXIATA (Indonesia) and Dialog (Sri Lanka) YoY, but on QoQ basis, all players saw a rebound led by XL AXIATA (+8%).

Wider coverage. We remain positive on the sector’s outlook premised on resilient demand from both consumers and business, locally and regionally. Players like AXIATA (via CELCOM) and DIGI looks set to benefit from return of migrant workers. Demand for local mobile and broadband will be supported with wider coverage at the end of Phase 1 of the Jendela Initiative. According to MCMC, 96% of populated areas has access to 4G network (92% before Phase 1 of Jendela) with average mobile broadband speed increased to 40.1 Mbps (35 Mbps initially). The promise of the 5G rollout will boost demand further with players like AXIATA and OCK benefitting from the construction and fiberization of more 3,500 towers under Phase 1 of the 5G rollout.

Maintain OVERWEIGHT with sector top picks of AXIATA, DIGI and TM. We reiterate our OVERWEIGHT call for the sector as we believe the market has already priced in a 5G model that is less favourable to telco operators. We raise our TP for AXIATA to RM3.65 (from RM3.45; after we rationalised our valuation basis to EV/EBITDA for its operating companies), DIGI to RM4.25 (from RM3.70; after we migrated to the valuation of the merged Celcom DIGI), OCK to RM0.95 (from RM0.45; after we factored in earnings contribution from 50% of its Jendela orders in FY23), and TM to RM7.75 (from RM6.70; after we rationalised our valuation basis to 7x FY23F EV/EBITDA).

Our top picks are as follows:-

AXIATA for (i) its strong foothold in the growing telco markets in the region, and (ii) its dominant position in the telco tower sector in the region via edotco;

DIGI for (i) its superior EBITDA margin at 47%-48% vs. the industry average of 41%, and (ii) the merger with Celcom, giving birth to a new market leader in the mobile market with combined market share of 44%; and

TM for (i) positive tailwinds on the digital space as economies reopen and the enhanced network coverage nationwide boosting internet demand from both public and business.

Source: Kenanga Research - 7 Sept 2022