We maintain our OVERWEIGHT rating on the telecommunications sector as we believe the market has already priced in various challenges related to the 5G rollout. The 4QCY22 results season saw 60% of stocks under our telco universe exceeded expectations while the remaining 40% came in below expectations. Broadly, all the telcos saw improvement in subscription, both locally and regionally. These trends look likely to sustain into CY23 with telecommunications entrenching deeper into everyday life, more so after the pandemic. An improved nationwide 4G coverage under the Jendela initiative and the expeditious 5G rollout will lay the foundation for the industry’s long term growth. We maintain our TP for AXIATA (OP; TP: RM3.96) but tweak TP marginally lower for CDB (OP; TP: RM4.64), MAXIS (OP; TP: RM4.52), OCK (OP; TP: RM0.69), and TM (OP; TP: RM7.75).

Resilient earnings. The just-concluded 4QCY22 results season was a mixed bag for stocks in our telco universe. AXIATA, CDB and OCK exceeded expectations whilst MAXIS and TM underperformed on account of higher-than expected depreciation charges and tax expenses largely incurred in the fourth quarter. The telcos as a whole saw commendable growth for CY22 with top line posting a 6% YoY uptick and core net profit ending higher 8% YoY on account of a strong EBITDA (9MCY22: 8% YoY) mostly coming in 9MCY22, contributed largely by AXIATA and TM. The reopening of the domestic and regional economies saw continued demand for telecommunications as consumers moved on from the pandemic. AXIATA saw a 10% top line uptick on generally strong all-round performance from its operating companies with the exception of Dialog (Sri Lanka) and Ncell (Nepal) but earnings surged 21% on strong contribution from Celcom (65% YoY) and Smart (Cambodia at 14% YoY). CDB and TM saw earnings uptick of 9% and 28%, respectively, as EBITDA improved 8% and 14% respectively. AXIATA’s EBITDA improved 11%.

Robust subscribers. Subscribers’ growth saw improvements YoY and QoQ, both regionally and domestically. AXIATA subscription was boosted by DIALOG and Ncell (Nepal) growing at 9% and 2%, respectively, despite inflationary pressures. Local subscriptions were led by TM which saw 13% YoY growth on competitive pricing, strong promotion and the promise of 5G services or broadband services. Blended ARPU was mixed as all players (local and regional) saw improvement YoY and QoQ with the exception of Ncell (-10% YoY and -5% QoQ).

Wider coverage. We remain positive on the sector’s outlook premised on resilient demand from both consumers and business, locally and regionally. Players like CDB looks set to benefit from return of migrant workers. Demand for local mobile and broadband will be supported by wider coverage towards the completion of Phase 1 of the Jendela initiative. According to MCMC, almost 97% of populated areas has access to 4G network (92% before Phase 1 of Jendela) with average mobile broadband speed increased to 52Mbps (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 more 5,500 towers under the next phase of the 5G rollout.

Maintain OVERWEIGHT with sector top picks of AXIATA, CDB and TM. We reiterate our OVERWEIGHT call for the sector as we believe the market has priced various challenges related to the 5G rollout. Despite lowering our TP on most of the telco stocks under our universe, we find valuations still compelling. We lower our TP for CDB to RM4.64 (from RM4.69; after guidance on low single-digit EBITDA growth), MAXIS to RM4.52 (from RM4.59; after we factored in lower leasing charges in FY23), OCK to RM0.69 (from RM0.91 on lower EBITDA), and TM to RM7.75 (from RM7.85 on account of higher operational costs). In our view, telco stocks are still undervalued and we reiterate our OVERWEIGHT call for the sector.

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.

• CDB for (i) its superior EBITDA margin at 47%-48% vs. the industry average of 41%, (ii) being the new market leader in the mobile market with combined market share of 43%, and (iii) competitive pricing in both postpaid and prepaid segments.

• TM for (i) positive tailwinds on the digital space as economies reopen and the enhanced network coverage nationwide boosting internet demand from both consumer and business segments, and (ii) its competitive pricing in the broadband space.

Source: Kenanga Research - 8 Mar 2023