AmInvestment keeps 'neutral' call on telecommunications sector

KUALA LUMPUR (Jan 20): AmInvestment Bank Research has maintained its "Neutral" recommendation on the telecommunications sector given the still substantive 5G capital expenditure (capex) requirements against the backdrop of government-targeted fiberised average revenue per user (ARPU) reductions under the National Fiberisation and Connectivity Plan (NFCP).

However, it notes that the sector could be re-rated if telcos consolidate, given the synergies these exercises would create while mitigating competition among different cellular operators.

"We note that the share prices of telco stocks have appreciated recently due to the rising trend of collaboration amongst the potential 5G mobile operators," it said.

However, it also noted that a de-rating could occur if revenues fell again, thanks to intensified mobile price wars and lower fixed broadband prices due to NFCP prerogatives.

"We are also cautious on possibilities of higher-than-expected increase in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G rollouts," it added.

AmInvestment noted that the RM7 billion-RM8 billion investment for 5G deployment in Malaysia indicated by the National 5G Task Force of the Malaysian Communications and Multimedia Commission (MCMC) is likely for targeted sites for high data usage, as their channel checks with industry sources indicate that the capex per square kilometre could be 10 times higher than 4G for selected locations.

It estimates that 4G capex spent by telcos has exceeded RM15 billion over the past five to six years on a nationwide coverage programme.

"Besides 5G spending, additional capex for 4G is still required given that only 40% of mobile towers in the country are fiberised, which has resulted in sub-optimal speeds and connectivity for 4G services.

"Evidently, a substantively higher proportion of fiberised mobile towers is needed to deploy 5G services," it said.

However, it notes that the MCMC has highlighted that telcos' capex spending trend has been declining, currently below the industry average.

Amongst the three main mobile operators, Digi's capex fell the most by 11% in financial year 2018 (FY18), while Celcom and Maxis dropped 6% and 5% respectively.

The investment bank cited aBloombergreport saying Telenor ASA and Khazanah Nasional Bhd have revived talks about a potential deal involving telcos Digi.com Bhd and Axiata Group Bhd.

Telenor holds a 49% stake in Digi.com while Khazanah owns 38% of Axiata, and the terms explored include Telenor's acquisition of Khazanah's stake, a merger of their telecommunications tower assets or consolidation in certain markets.

"In our view, the increasing importance of collaboration and pooling of resources amongst key players against the backdrop of rising 5G capex rollouts and intense cellular competition currently amid the government's policy to expand broadband connectivity to rural and remote regions have highlighted the imperative for consolidation in the telco sector," it said.

Additionally, it also said acquiring a minority stake could still allow Telenor to strengthen its presence in Asia while easing political concerns in Malaysia.

The research house said its only "Buy" currently is Axiata, given its low enterprise value over earnings before interest, tax, depreciation and amortisation (EV/Ebitda) valuations and rising prospects for monetisation of its multiple businesses.