MIDF is of the view that the local telecommunication sector progress is in line, the Jendela 3QCY22 report indicated that Phase 1 performance is on track with around 7.44m fibre premises passed achieved as of 30 September 2022 vs 7.5m end-2022 target under Phase 1. Additionally, the mobile broadband speed of 52.48Mbps has surpassed the end-2022 target of 52.48Mbps. The only worry action plan left is for the 4G population coverage to reach 96.9% vs 95.82% in the 3QCY22 report, given its remote and interior geographical conditions.
On the other hand, the 5G rollout by Digital Nasional has reached 33.2% of population coverage with 1,915 sites completed vs end-2022 target of 37.9% population coverage with 3,518 sites. Even though the progress is still halfway from the end-2022 target number of sites, MIDF said it maintains the expectation that 5G will be a game changer in the telco sector. …however, the winning strategy for 5G differs from the previous network generation.
While so many industries verticals would like to take advantage of the advanced speed of the 5G network which offers 10 times faster than 4G network and improved capacity, it is essential to learn that monetising 5G network requires 5G ecosystem that is highly driven by the industry digitalisation, which differs from traditional telco revenue streams that depend heavily on consumer segments. The success of telcos in the 5G era now increasingly depends on the strength and range of its ecosystem partners as well.
The completion of the Celcom-Digi merger has positioned itself to be the largest telco company in Malaysia. While it takes a while to streamline its operations, assets, and network resources; CelcomDigi could expand its product portfolios, leverage existing subscribers acquired combined talents and technologies, and provide better service to the customers. The merger-co will hold 30% more pool of spectrum for mobile data usage as compared to Maxis, the closest rival. This is because Celcom-Digi still holds 150MHz worth of spectrum even after the divestiture of 70MHz. With the larger pool of spectrum mobile data usage, MIDF thinks CelcomDigi could offer a better user experience to their customers.
In this respect, the house stays NEUTRAL on the stocks. While network progress stays in line coupled with the signing of the 5G access agreement by the telcos excluding Maxis, the view on this sector is such given the regulatory risk of the new government who could reassess the SWN model and DNB, unready 5G ecosystem to accommodate for mass 5G commercial usage and ongoing competitive cellular market environment.
All in all, MIDF favour the fixed-line player, TM (BUY, TP: RM7.10) due to owning comprehensive fiber infrastructure, robust demand for fixed broadband services, plenty of business opportunities under MyDigital Initiatives and Axiata (BUY, TP: RM4.61) due to its regional exposure in the growing market that could churn more earnings potential.
