Stock Pick: Telecommunication Sector- Neutral

RHB maintains NEUTRAL on the sector rating with competition and near-term policy risks shrouding the outlook. Sector valuation is fair, at 8x FY22F EV/EBITDA (-1.5SD from its historical mean) given the pressure on wallet share. We see some recovery in revenue as travel restrictions ease and as the country moves into the endemic phase.

5G is not likely to be a game changer with a potential change in the wholesale framework. Fixed line players Telekom Malaysia (TM) and OCK are Top Picks, while Axiata Group is the preferred mobile pick.

5G makes landfall but…5G trial services were unveiled on 15 Dec with mobile users in parts of the Klang Valley, Putrajaya and Cyberjaya being the first to experience the high speed, low latency network. The actual commercial rollout was deferred as wholesale agreements have yet to be inked by the telcos with Digital Nasional Berhad (DNB), the government owned single wholesale network (SWN) provider. Execution and regulatory risks have steepened with Communications and Multimedia Minister Tan Sri Annuar Musa stating that the Government is reconsidering the SWN model for 5G rollout following feedback from the telcos and industry stakeholders.

A 14 Dec Reuters report which cited industry sources, revealed that a new proposal for two parallel 5G wholesale networks to be owned by separate consortiums networks has been put forward. Inherent in the proposal is the
inclusion of telcos in the country’s 5G deployment vs the current SWN framework. The consortium will utilise existing infrastructure to expedite 5G rollout over the next 12-18 months. We believe the Government may consider this workaround option to appease mobile network operators (MNOs) as: i) It is still consistent with the stated objectives of eliminating resource duplication with consortium members forging network partnerships, ii) there is redundancy in an alternative network (a key bone of contention), and iii) it facilitates network competition and innovation,
which is at the heart of the shift towards 5G. We note the regulator has also granted the option for MNOs to roll out their own 5G Core (5GC) as part of the access list review published on 2 Dec.

This marks a departure from the initial position taken whereby DNB is set to deploy a 5GC standalone (SA)
network exclusively, providing some leeway for MNOs. The arguments for individual 5GC networks are multifold – a single network presents a higher risk of a single point of failure, MNOs would lose the ability to differentiate
and innovate their services, and the lack of control over customer relationships.

Mobile revenue to remain subdued in 2022, fixed players should continue to excel. We see mobile revenue supported by extended policy initiatives to ensure affordable communication services for the masses. For 9M21, the industry’s mobile service revenue (MSR) (Big-3) gained 1.1%, supported by the B40 campaigns and relatively steady ARPUs while core sector mobile earnings improved 1% YTD (3Q21: +3% QoQ), mainly from the strong recovery in Celcom’s earnings. Meanwhile, fixed line revenue rose 7.5% YTD (3Q21: 1.3% QoQ) on robust fixed broadband (FBB) subs
growth while EBITDA and core earnings grew 10% and 12% YTD on opex savings.

Key downside risks for the sector are competition, weaker-than-expected earnings, and negative regulatory developments.

Contributed by RHB Research

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