Management remains sanguine on its broadband business, despite nonrenewal of anchor project, 1Bestarinet. The Group’s optimism stems from: (1) launch of 5G services and potential new low-band spectrum may close the competitive gap between YES and market leaders, (2) high demand for new Terragraph broadband services, and (3) cost savings from infrastructure sharing under the National Fiberization and Connectivity Plan (NFCP). Nevertheless, we believe the Group is not out of the woods yet - due to earnings and regulatory headwinds across multi jurisdictions. Maintain Sell on YTL Power (YTLP) with unchanged Sumof-Parts target price (TP) of RM0.71.

Doors Opening Up for YES. Management remains sanguine on 60%-owned YTL Communications’ (YTLC) prospects. This is in spite of a challenging road thus far, including setbacks with Wimax technology, and the recent non-renewal of 1Bestarinet (1BSN) project. Accordingly, this is reflected in protracted pretax losses for YTLC since 2011. Nevertheless, moving forward, management is optimistic on new opportunities for its mobile services arm, YTL E-Solutions (YES). This is underpinned by:- (1) launch of 5G technology, (2) potential award of low frequency spectrum, (3) rollout of Terragraph wireless broadband, and (4) cost savings from infrastructure sharing under the National Fiberization and Connectivity Plan (NFCP). Against this improved backdrop, management is upbeat that YES will appeal to potential foreign investors. Therefore, the Group does not discount the possibility of roping in a strategic equity partner for YES.

Eyeing 700MHz Spectrum. YTLP is eyeing the 700MHz spectrum - which management believes will boost YES’ competitive advantage. To recap, in Jul-19, the Malaysian Communication and Multimedia Commission (MCMC) opened a public inquiry on the proposed allocation of the 700MHz, 2300MHz and 2600MHz spectrums. MCMC proposed to allocate the 700MHz via a beauty contest (i.e. fixed price) to potentially 4 players (20MHz per operator). The spectrum assignment is targeted for completion by 2Q-3Q CY20. We believe that the 700MHz spectrum would reduce YES’ handicap versus the Big-3 (Maxis, Celcom, and Digi) telcos and UMobile (Figure 1). Unlike its peers, which currently hold 900MHz spectrum, YTLP does not own low frequency spectrum holdings. Instead, YTLP transmits solely via high frequency 2.3GHz (30MHz) and 2.6GHz (20MHz).

Need New Low Frequency Spectrum. To recap, the advantage of high frequency spectrum lies in higher throughput – which implies higher data speeds. On the other hand, low frequency spectrum have longer wavelengths (versus high frequencies), that are able to travel further and penetrate objects more effectively. Therefore, this results in a larger footprint and better in-building coverage. Hence, this reduces the number of base transceiver stations and building antenna systems required. Given uncertainty of tower arrangements following non-renewal of 1Bestarinet (1BSN), we believe YTLP would benefit from new 700MHz spectrum resource. This would likely reduce YES’ network capex and transmission opex. However, this is assuming that spectrum costs are reasonably affordable for YTLP.

Betting on New Tech and 5G. Additionally, management believes that YES will benefit from upcoming launch of 5G services in Malaysia (2021-22), as well as rapid technology advances. To recap, MCMC will expand 5G trials nationwide after successful launches at Putrajaya and Cyberjaya in Apr-19. We concur that the new 5G era would partially level the competitive field for the telco industry. This is because the race for fresh investments in 5G technology have not started in a big scale yet. Therefore, YES could potentially surpass competitors in 5G services, particularly in terms of costing. This is given its lean all-LTE/IP network without legacy 2G and 3G equipment. Therefore, although YES lacks scale and financial muscle versus its peers, YTLP could leverage on frontier technology to gain advantage. Additionally, YES could carve its own unique niche in fixed broadband outside of the competitive mobile market.

Banking on Fast & Cheap Terragraph. For instance, YES’ launch of Facebook’s Terragraph WiFi services marks an ambitious foray into new lowcost 5G technology. To recap, the latter is the 1st millimetre wave network, as well as the 1st large-scale IPv6 network in Malaysia. In Mar-19, YES launched Terragraph at George Town, Penang. Thus, Malaysia is the 2nd country, after Hungary, to run large scale trials of this service. YES’ network in Georgetown consists: - (1) 400 nodes connecting 100 businesses, and (2) 50 public Wi-Fi locations with 10,000 users. This network is capable of delivering high speeds in excess of 100Mbps. In a nutshell, Terragraph is a wireless technology that provides high-speed internet access. It uses radio nodes that leverage on lower V-band spectrum frequencies (60GHz). These nodes are installed on existing street furniture (e.g. street lamps or buildings), thus resulting in a low-cost scalable network. Terragraph offers fibre-like speed, and is ideally suited for lastmile fixed access in urban and suburban areas.

Potential Beneficiary of NFCP. Management views YES as a beneficiary of the recently launched RM21.6bn National Fiberization and Connectivity Plan (NFCP) (end: 2023). To recap, some of NFCP’s key objectives include price reduction, as well as quality and coverage improvement for broadband services. Corresponding NFCP strategies include, amongst others:- (1) infrastructure sharing, (2) access to passive infrastructure – including civil infra, (3) sharing of passive infra to reduce costs, and (4) planning broadband as public utility. The above is expected to lower network costs and capex, as well as improve transmission quality (speed and coverage). In particular, we believe that YES would benefit from third party access of peers’ fibre backhaul at affordable pricing. Inturn, this would drive YES’ subscriber base expansion. Meanwhile, usage of federal and state buildings for network roll-out will facilitate deployment of Terragraph.

Maintain Sell Due to Unrelenting Headwinds. In spite of a transforming telco landscape, we believe that the Group is not out of the woods yet. Earnings and regulatory headwinds include:- (1) 1BSN: possibility of worse than expected drag from early termination of 1BSN contract, (2) Power Seraya: potential of sustained losses due to excess oversupply in electricity markets and coupled with impending removal of government vesting contracts, and (3) Wessex: the government’s clamp down on gearing limits could result in reduced repatriation of dividends. Therefore, we prefer to avoid the stock for now. This is in spite of multi-year low valuations, coupled with long term projects in the pipeline (i.e. Attarat Power and Tg. Jati). Our unchanged Sum-of-Parts target price (TP) of RM0.71 implies CY20 P/E of 10.5x.

Source: TA Research - 15 Oct 2019