• Fixed line still in vogue. The recently concluded reporting season saw fixed line core earnings growth of 27% YoY in 4Q22 thumping the mobile segment’s -16.2% YoY. Most telcos delivered in-line results, with Axiata outperforming for the consecutive second quarter. We continue to prefer the fixed line players owing to their more discernible catalysts and structural drivers. Maintain NEUTRAL, with Telekom Malaysia (TM) as a Top Pick. We also like OCK Group for its strategic exposure to 4G/5G site deployments and the undemanding valuation.

• Mobile service revenue (MSR) should see further improvements. Industry MSR grew 2.3% YoY in 4Q22 (+0.9% QoQ), the strongest YoY growth since the pandemic (2022: +1.3%). We see a further recovery in FY23F (low single-digit growth projected) from stronger roaming and prepaid revenues (higher migrant traffic). Economic headwinds, however, should continue to temper industry APRUs with tactical promotions targeted at the lower-end/price-sensitive segment.

• The colossal task of integrating networks. We learnt from CelcomDigi (CDB) the network request for proposal (RFP) process has concluded with the terms being finalised. This should pave the way for the commencement of site integration works. CDB plans to shut-down c.6-7k sites (of over 23k nationwide) over 18-24 months. The guided integration synergies (NPV of MYR8bn over five years) are likely to be backloaded, in our view, as opex and capex should remain elevated in FY23F from merger-related costs. CDB booked MYR190m in merger-related and one-off costs in 4Q22.

• Fixed line marred by lumpy sales. Aggregate fixed line revenue fell 3.4% QoQ (-5% YoY) in 4Q22, mainly due to lower indefeasible rights of use (IRU) sales and international voice revenue at TM. Meanwhile, overall industry FY22 revenue grew 6%, with sustained double-digit revenue growth at Time dotCom.

• Mandatory Standard on Access Pricing (MSAP) out of the way; commercial discussions underway. The new access price framework which came into effect on 1 Mar saw Layer 3 service gateway prices decline by 51-65% vs the initial 41-52% decline proposed by the regulator in its public inquiry paper. We expect the discussions with fibre wholesale access seekers on new commercial agreements to complete by mid-year. We previously assumed a 5-10% impact on TM’s uniFi ARPU for FY23F- 25F from lower access prices. In the 2018 access price revision, uniFi’s ARPU fell c.21% between 2018 and 2020, with the impact partially mitigated by stronger subscribers growth and promotions.

• Single Wholesale Network (SWN) – to be or not to be. The Government is expected to announce its decision on the 5G implementtation policy by end-March. We see the current 5G rollout by Digital Nasional Berhad or DNB continuing as population coverage has surpassed 50%, albeit, with refinements to the operating model which could translate into lower wholesale cost for telcos.

• Key risks are competition, weaker-than-expected earnings, and regulatory and/or policy upheavals.

Source: RHB Research - 21 Mar 2023