We remain OVERWEIGHT on the telecommunications sector. There was a slight sequential improvement in earnings delivery (against our expectations) by the sector in the recently concluded 2QCY23 results season. Similarly, operationally, all players saw improvement in subscription and ARPU, both locally and regionally. We view positively the change in the roll out model for 5G services in Malaysia to a more market-driven dual network model, from a monopolistic single wholesale network model. Our sector top picks are CDB (OP; TP: RM5.06), MAXIS (OP; TP: RM5.30) and OCK (OP; TP: RM0.73).

Better earnings delivery. There was a slight sequential improvement in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 results season with 20%/60%/20% coming in above/within/below our forecasts vs. 60%/40% coming in within/below in the preceding quarter (see table on Page 2). TM (OP; TP: RM6.23) beat expectations on higher-than-expected tax credit utilised. AXIATA (OP; TP: RM3.60) disappointed given the higher-than-expected depreciation and funding costs, notably from its regional operating companies. There was a surprise in terms of dividend payments - CDB, MAXIS and TM declared higher DPS for the quarter (5%, 3% and 14% YoY, respectively), and CDB reitereted its commitment to giving out a higher progressive dividend in FY23. The telcos as a whole saw resilient top line growth in 2QCY23, driven by the reopening of the domestic and regional economies as life returned to normalcy, coupled with consumers embracing digitalisation on affordable and flexible packages and as they increasingly use digital platforms to socialise, look for entertainment and perform tasks. In the meantime, business and enterprises are accelerating their digitalisation for sustainable growth.

Operating numbers remained resilient. Subscribers’ growth saw improvements YoY both regionally and domestically. AXIATA’s subscription was boosted by DIALOG (Sri Lanka) and Robi (Bangladesh), growing at 3% and 3%, respectively, despite inflationary pressures. Local subscribers for CDB and MAXIS saw 3% and 2% uptick, respectively, with CDB‘s subscriptions underpinned by Digi (+7%). Domestic market ARPUs remained resilient YoY (both postpaid and prepaid). AXIATA’s blended ARPU was mixed with XL and Robi showing improvement YoY (+8% and +18%, respectively) but Dialog and Ncell declined (-1% and -6%, respectively). In the broadband subscription, TM was still ahead of the pack in terms of market share followed by MAXIS but both CDB and MAXIS’s subsribers surged, 25% and 15%, respectively. Broadband ARPUs were still robust but TM might suffer erosion once the revised MSAP is implemented.

No let-up in wider and efficient coverage. We remain positive on 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 start of Phase 2 of the Jendela initiative. 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 valuations are still undemanding as we view positively the change in the roll-out model for 5G services in Malaysia to a more market-driven dual network model from a monopolistic single wholesale network model, wider and efficient coverage and affordable and flexible packages for consumers.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 and (iii) its foothold in the roll-out of 5G base from its nearest competitor and at affordable and flexible packages.

• MAXIS for: (i) its expanded 4G coverage, (ii) its 5G roll-out where its interim access costs would likely be lower than peers, (iii) its 5G roll-out attracting both corporates and SMEs as they accelerate their digitalisation into the digital age, (iv) its margins that are likely to improve on account of higher-end products and services being offered, and (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 - 12 Sept 2023