Looking at the telecommunications sector, analysts continue to like fixed-line plays over mobile ones, given the former’s stronger and more discernible growth prospects. The sector’s forward EV/EBITDA, at 1SD below the historical mean, can be justified by regulatory risks, the still-tight competition in the mobile space, and 5G monetisation challenges. Perhaps this could be the reason research houses are maintaining a NEUTRAL call on the sector.
A pick-up in international travel, with China having ended its zero-COVID policy, should drive a further recovery in MSR. RHB research projects the industry MSR to grow by 2-3% YoY in FY23F, from 1-2% YoY in FY22F. While 5G population coverage (as reported by Digital Nasional (DNB) topped 47% in end-2022, analysts see minimal 5G contributions – 4G services and rich data quotas are more than sufficient to meet data demands of users, alongside the dearth of retail use cases.
Celcom Digi has affirmed the MYR8bn (5-year net present value) merger synergies at its maiden investor briefing held in midDec 2022. This factors in the undisclosed integration cost and regulatory remedies. The biggest portion of the synergies will accrue from network savings (MYR5.5bn), for which additional clarity is only expected after the release of 1Q23 operational numbers/results (standalone and MergeCo) and guidance on 24 Feb. Based on pro-forma earnings that assumes higher debt and MYR200m in merger-related costs, CDB’s FY23F core EPS could decline by 5.1% (excluding 5G wholesale cost).
However, the 5G policy and regulatory risks continue to linger. On 5 Dec 2022, newly minted Prime Minister Datuk Seri Anwar Ibrahim called for a review of the 5G model and network tender process. Minister of Communications and Digital Fahmi Fadzil said there should be “some kind of finality” on the 5G issue in 1Q23, with the Cabinet to make a final decision. That said, the 5G rollout by DNB is ongoing, with the wholesale costs incurred by the telcos (except Maxis) from Jan 2023.
The public inquiry on the MSAP commenced on 5 Oct 2022, with an extended 17 Jan (from 3 Jan) deadline for feedback and submissions by industry players. In the public inquiry paper, the regulator had proposed a preliminary 41-52% decline in high-speed broadband access prices (Layer 3) for the next regulatory period (2023-2025) – this was a surprise, as the regulator had previously highlighted it was comfortable with retail price competition in the market.
In view of this mixed bag of circumstances, RHB said it gathered from TM that inflationary pressures and the higher cost to serve were not factored in by the regulator in its preliminary proposal and where it had presented its case in a comprehensive submission last month. Assuming a 10-15% decline in uniFi’s ARPU for FY23- 24F, TM’s core earnings could be hit by 11-20%.
Key downside risks for the sector are regulatory setbacks, competition, and negative earnings surprises.
