Malaysia recently announced the Jendela initiative which aims to boost connectivity nationwide especially in rural areas. Macquarie Equities Research has a constructive view on the Malaysian telecoms sector going into 2021 as the initiative derisks the sector from premature 5G spend. MQ Research believes that growth will be a key driver to rerate sector with fixed lines revenue to improve. MQ Research remains Telekom Malaysia as its top pick while upgrading Maxis to Outperform.

Event

• MQ Research is constructive on the Malaysian telecoms sector going into 2021 with a preference for operators exposed directly to the digitalisation of the Malaysian economy in a post-COVID world. The government’s recently announced Jendela initiative is, in MQ Research’s view, an evolution of the national fiberisation and connectivity plan (NFCP) with an increased focus on quality of service improvements in the near term, before embarking down the 5G path – derisking the sector. While price competition remains a drag on service revenue growth, operators still have numerous levers to pull to rein in costs, supporting earnings and free cash flow (FCF) growth. Growth, MQ Research believes, will be a key driver of a sector rerating, which has taken a hit in line with regional peers on fears of higher spend (on 5G) without commensurate returns.

Impact

• Jendela derisks the sector. MQ Research sees the Jendela initiative, announced during the IMKL2020 conference as a key event for the sector. The government’s focus on network quality and LTE coverage before 5G will defer the latter and derisks the sector by not having to invest heavily in a new network which may take time to achieve mass adoption. This will mean that the sector will be investing more heavily in fibrerisation of networks and increasing coverage in suburban Malaysia rather than new 5G access for consumers. Industrial and Enterprise 5G rollouts are likely to continue. As such, MQ Research expects industry capex to hold at approximately RM5bn pa with rural rollouts funded by the USP Fund.

• Data pricing headed lower but so are costs. Recent moves by operators to introduce unlimited fixed speed data and larger bucket plans are, in MQ Research’s view, a reflection of the falling cost of carrying the data and should have limited impact on margins/profitability. Aiding earnings before interest, taxes, depreciation and amortization (EBITDA)/profit development will be a push into new segments eg Maxis’ push into Enterprise and home fibre.

• Digitalisation a new growth driver. The COVID pandemic has accelerated the digitalisaton of the Malaysian economy with both public and private sectors moving to digitalise. For the telcos this will lead to new mobile use cases (IoT), increased connectivity and solutions. Fixed operators, TM and Time, and Maxis with their fixed connectivity, data centres and enterprise solutions are MQ Research’s preferred plays in this space. MQ Research sees fixed line revenues increasing at an 8% compound annual growth rate between 2019-2022 as a result, vs 3% for the sector.

Outlook

MQ Research’s top pick in the Malaysian telcos space remains with Telekom Malaysia. MQ Research has upgraded Maxis to an Outperform and Time dotCom is MQ Research’s preferred small-cap play on the digitalisation thematic. Valuations of the Malaysian telcos, while still at a premium to regional peers, have declined in line with their regional cohort, as investors moved funds out of ASEAN and away from telcos on fear of the lack of monetisation of their 5G investments. The Jendela initiative, MQ Research believes, has made Malaysia standout in this respect.

Source: Macquarie Research - 5 Oct 2020