RHB Research has maintained a “NEUTRAL” rating on local telecommunications sector. Whilst top picks of this sector are: Telekom Malaysia (TM), Time dotcom, and OCK Group. This sector core earnings slipping c.2% in FY22F (2021: +10.8%), due mainly to Cukai Makmur and the (still) tight mobile competition, followed by a 12% rebound in FY23F. Telcos should continue to defend/improve their wallet share amidst the inflationary pressure. The 5G fiasco appears to be moving towards a closure with Digital Nasional (DNB)’s equity stake sale and wholesale agreements being finalised. Maintain NEUTRAL sector rating with fixed line plays still favored.
A sprinkling of surprises. Relative to our forecasts, TM and Axiata’s results were a beat in the June quarter (2Q22) while the other telcos and telco-related infrastructure names within RHB’s coverage delivered in line earnings. TM’s outperformance came from a stronger than expected EBIT (1H21: +29% YoY) while Axiata’s earnings were bolstered by steady growth across most mobile assets (exceptions being Ncell and Dialog) with Celcom and edotco as stand-outs. Meanwhile, Time dotCom (TDC) surprised with a special DPS of 16.34 sen (payable on 27 Sep). On an aggregate basis, fixed line 2Q22 core earnings, at +36.7% YoY, continued to drub mobile earnings (+1.4% YoY).
Mobile service revenue (MSR) picks up steam, Maxis takes further share. A pick up in international travel and the progressive return of migrant workers contributed to the 1.7% QoQ (+1.1% YoY) lift in industry’s MSR (Big-3 telcos) in 2Q22 as prepaid revenue advanced 2% QoQ (1Q22: -1.1% QoQ) – the strongest since 3Q20. Postpaid revenue ticked-up 1.3% QoQ (+3.5% YoY), aided by pre-to-post migration and relatively steady ARPU with stronger subs growth. With the strong 2.9% QoQ growth in mobile revenue, Maxis’ MSR share widened for the second quarter in a row to 39.1% in 2Q22, at the expense of Celcom and Digi whose MSR share narrowed to 31.3% and 29.5%. The decline in Celcom’s subs base continued into 2Q22 from higher rotational prepaid churn following the high base of subs-adds in 4Q21.
Field day for fixed line. The robust internet growth alongside the strong uplift in wholesale revenue for TM (5G backhaul, broadband access) fueled the 6.2% QoQ/11.3% YoY growth in industry 2Q22 fixed line revenue. The +7.7% QoQ turnaround in TM One’s (enterprise and public sector arm) revenue which was also the first YoY growth in five quarters suggests enterprise digitalisation initiatives are picking-up after being stricken by delays for much of 2020-2021 due to the pandemic. Positively, TM also guided for incremental contribution from its newly set-up digital services arm (Credence) in 2H22.
Moving towards a closure. The impasse on the country’s 5G execution may come to an end soon. Media reports on 2 Sep cited the Finance Minister, Tengku Datuk Zafrul Abdul Aziz, as saying that “the process (sale of equity stake in DNB to the remaining four telcos- TM, Celcom, Digi, and YTL/YES following the decision by Maxis and U Mobile not to take up the initial 11.7% stake offered) is expected to conclude in two weeks”. A 31 August statement from DNB highlighted that discussions with all six telcos on wholesale agreements are proceeding on a separate and independent track.
Key risks: Competition and unresolved 5G developments.
Top Picks – Target Price
Telkom Malaysia – MYR7.40
Time dotCom – MYR5.00
OCK Group – MYR0.56