• Top Picks: Telekom Malaysia (TM), Axiata Group and CelcomDigi (CDB). On a relative basis, we still prefer fixed/integrated players (over mobile) given the more discernible structural catalysts. The tight competition among MNOs should continue to suppress data yields with tactical promotions to sustain wallet share. While the announcement of the 5G spectrum recipient should remove the long sector impasse, we think upside risks may still be capped by uncertainties as to the overall impact on sector earnings, dividends and 5G cost to serve. Keep NEUTRAL.

• Competition stays tight; wallet share still in focus. MNOs continue to pursue tactical campaigns to reaffirm their value propositions. We see continuing pressure on mobile data yields (unlimited offers still dominate campaign taglines) with pre-to-post migration activities and up-selling of fibre broadband (FBB) packages providing ARPU support. 5G adoption momentum has pickedup, thanks to attractive device campaigns. The lack of retail use cases and high data quotas suggest monetisation will take time.

• Digital assets seeing good value illumination. Valuation of digital infrastructure assets has gotten a boost from the start of the interest rate downcycle. This could spur further corporate actions and M&As in 2025, in our view, with infrastructure-backed telcos in the limelight. We view TM as a key beneficiary of the data centre (DC) and artificial intelligence (AI) boom given its stranglehold over fibre and digital infrastructure assets in the country. The expansion of its twin- core DC facilities in Cyberjaya and Iskandar Puteri would allow it to meet stronger co-location demands with DC EBITDA potentially doubling in FY27F. TM’s JV with Singtel (ST SP, BUY, TP: SGD3.50) to develop a 64MW AI-DC in Johor could potentially contribute MYR80-85m in earnings (c. 4% of FY27F PATAMI and MYR0.37 to TM’s DCF valuation, based on our estimates). TM is well placed to secure more DC connectivity jobs with the commissioning of its new cable landing station in Morib expected to be ready for service in 2025.

• 5G spectrum tender outcome may not be the be-all and end-all. While the revelation of the new 5G spectrum recipient (we see Maxis as the front-runner) should end the long 5G impasse in the sector, we see uncertainties and greater clarity sought on the underlying impact on earnings from wholesale cost, cost to serve (with 5G traffic eventually split two ways between Digital Nasional Berhad and Entity B) and capex limiting upside risks for MNOs. We see the outcomes as contingent on network collaborations to be formed with non-5G spectrum holders. The dual 5G network framework pivots the sector from a single wholesale network (SWN) model where 5G wholesale costs incurred by access seekers have thus far been incremental. Additional 5G spending from the second 5G network provider and site densification works should nonetheless benefit players involved in infrastructure deployment such as TM and OCK Group.

• Key downside risks for the sector/stocks are competition, weaker-thanexpected earnings and regulatory setbacks.

Source: RHB Securities Research - 23 Oct 2024