We maintain our OVERWEIGHT rating on the telecommunications sector as we believe there is still valuation upside following the change in the sector’s 5G model from Single Wholesale Network (SWN) to more market-driven Dual Network (DN). Technically, there was a sequential deterioration in earnings delivery by the sector in the recently concluded 1QCY23 reporting season largely due to accounting useful life reduction for telco assets. However, operationally, all players saw improvement in subscription and ARPU, both locally and regionally. Our sector top picks are CDB (OP; TP: RM5.15), MAXIS (OP; TP: RM5.30), and OCK (OP; TP: RM0.73)

Accounting technicality. Technically, there was a sequential deterioration in earnings delivery by the sector in the recently concluded 1QCY23 reporting season with 60%/40% coming in within/below our forecasts vs. 60%/40% coming in above/below in the preceding reporting quarter (see table on Page 2). MAXIS, OCK and TM (OP; TP: RM6.23) performed within expections but CDB and AXIATA (OP; TP: RM4.18) were let down by higher-than-unexpected depreciation charges due to the reduction in the accounting useful life for CDB’s telco assets. The telcos as a whole saw resilient top line growth in 1QCY23, driven by the reopening of the domestic and regional economies as life returned to normalcy for consumers while business accelerated digitalisation for sustainable growth.

Strong operating numbers. Subscribers’ growth saw improvements YoY both regionally and domestically. AXIATA’s subscription was boosted by DIALOG (Sri Lanka) and Robi (Bangladesh) growing at 7% and 3%, respectively, despite inflationary pressures. Local subscribers for CDB and MAXIS saw 3% and 4% uptick, respectively, with CDB‘s subscriptions underpinned by Digi (+9%). Domestic market ARPUs remained resilient YoY (both postpaid and prepaid). AXIATA’s blended ARPU showed improvement YoY (with the exception of its Nepal operation) led by Robi. In the broadband subscription, TM is still ahead of the pack in terms of market share followed by MAXIS, but MAXIS‘s broadband subscribers saw a slight dent YoY. On a brighter note, broadband ARPUs were still robust but but might suffer erosion once the revised MSAP is implemented.

Wider and efficient 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, wider coverage and larger Point of Presence. Demand for local mobile and broadband will be supported by wider and efficient coverage with 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 116Mbps (35 Mbps initially). The promise of a 80% COPA and JENDELA 2 will accelerate demand further with players like AXIATA and OCK benefitting from the construction, ugrading and fiberization of towers.

We reiterate our OVERWEIGHT call for the sector as we believe there is still valuation upside following the change in the sector’s 5G model from SWN to more market-driven DN. Our top picks are:

• CDB for: (i) being an entity that will become well entrenched in the public sector and migrant worker space, dominating the mobile market share at 43% and dwarfing other MNOs, (ii) its competitive pricing and attractive bundling to attract migrant and domestic customers, (iii) the roll-out of 5G that will likely further boost its subscriber base given the absence of MAXIS at this early roll-out stage.

• MAXIS for: (i) its expanded 4G coverage, (ii) the impending 5G roll-out where its interim access costs would likely be lower than peers, (iii) the full-year impact of the reopening of the economy, and i(v) brand loyalty from its premium customers.

• OCK for: (i) the tremendous growth opportunities in the telco infrastructure space both at home and abroad especially in the under-served areas, (ii) being well positioned to benefit from Jendela 2 and 5G roll-out domestically and other ASEAN markets, (iii) its earnings stability and visibility with about 53% of its revenue being recurring from telco tower maintenance and telco tower leasing, and (iv) its potential expansion to other new markets in the region i.e. Indochina, Kalimantan and the Philippines.

Source: Kenanga Research - 13 Jun 2023