• Fixed line plays still in vogue; preferred picks: Telekom Malaysia (TM), Time dotCom (TDC) and OCK. Telcos’ 1Q22 results were characterised by seasonality but generally tracked in line. The economic reopening is driving a stronger recovery in industry revenue, with the focus still on wallet share as inflationary pressure mounts. Telcos are down c.23% YTD (-19% vs FBM KLCI), with 5G uncertainty as the key sector overhang. Downside risks: Greater competition, adverse regulatory developments and earnings setbacks. The opposite circumstances would present upside risks. NEUTRAL.

• Meeting expectations. All telcos within our coverage (including an infrastructure services company) delivered in-line core earnings for the March reporting quarter (Figure 1) with the exception of a mild earnings beat from Digi. Aggregate sector earnings improved 2.8% YoY (-8% QoQ) in 1Q22 with fixed line earnings (again) outdoing its mobile peers, at +5.3% vs +1.5%. Aggregate FY22 sector core earnings are estimated to decline by c.9% (FY21: +12%) – due mainly to Cukai Makmur – but should rebound by about 16% in FY23F.

• Mobile service revenue (MSR) expanded 0.9% YoY in 1Q22. Industry MSR (Big-3 telcos) fell 1.1% QoQ in 1Q22 due to weak seasonality. After four consecutive quarters of growth, Celcom’ MSR dropped 3.5% QoQ as its prepaid subs base contracted 0.3% QoQ (after the high base of net-adds in 4Q21 and steepened competition) while Digi’s MSR dipped 1% QoQ. Maxis was the only big-3 telco that posted sequential MSR growth (+0.8% QoQ) (4Q21: -2.4% QoQ). Consequently, its revenue market share (RMS) inched up to 38.5% (4Q21: 37.8%), mainly at the expense of Celcom whose RMS eased to 31.7% (4Q21: 32.5%) while Digi’s RMS was stable at 29.8%. We see the continued focus on wallet share by the telcos, on the back of inflationary pressure and consumers tightening their belts. Strong cost discipline should mitigate earnings pressure and the impact from Cukai Makmur.

• Fixed line still rules. We see fixed line operators sustaining their earnings momentum on structural demand and policy initiatives. TM’s 1Q22 core earnings grew 3% YoY (including a MYR105m voluntary separation scheme cost), while TDC’s core earnings rose 16.1% YoY. Aggregate fixed line EBITDA was steady (+1% YoY), with good cost discipline and opex restraint.

• The elusive 5G. It has been over two months since the Government’s decision to retain the single wholesale network (SWN) and the publication of the reference access offer document by Digital Nasional (DNB). There is still no certainty that the Big-4 telcos (Celcom, Maxis, Digi and U-Mobile) would ink 5G wholesale agreements or acquire individual stakes in DNB by the stipulated end-June deadline. Key areas of discontent are on the prohibitive wholesale pricing structure (10-year agreement), the ability to “influence” decision-making and justify their investments without a majority stake in DNB. At its 1Q22 results call, Axiata said it should be able to meet the deadline. It is also uncertain if the Government would relent on the proposal by the the telcos for majority control of DNB, with the Communications and Multimedia Minister saying that the matter has yet to be decided upon. The stalemate on the SWN continues to be a key sector overhang, with Malaysian telcos being the worst performers among the ASEAN-4 telcos YTD.

Source: RHB Securities Research - 10 Jun 2022