Neutral outlook for telecommunications sector

Telecommunications sector
Maintain neutral:Bloomberg reported that Khazanah Nasional Bhd has revived negotiations with Telenor ASA, which owns a 49% equity stake in DiGi.Com Bhd, for a potential deal involving Axiata Group Bhd. Recall that the proposed merger between Axiata and Telenor Asia for their telecommunications and infrastructural assets in Asia was aborted in September 2019 after four months of due diligence due to undisclosed complexities. The parties did not rule out a future deal given the underlying strategic rationale.

The aborted merger proposal was estimated to have pro forma revenue of over US$12 billion (RM48.72 billion) and earnings before interest, taxes, depreciation and amortisation (Ebitda) of over US$4.8 billion with operations in nine countries servicing 300 million customers. According to Bloomberg, Khazanah and Telenor are in the early stages of exploring possible scenarios, including Telenor buying part of the sovereign wealth fund’s 38% equity stake in Axiata and a subsequent merger between Axiata and Telenor’s telecommunications tower assets or a consolidation in certain markets. Another option could be a combination and listing of the two carriers’ overseas operations. As these are still in exploratory stages, any merger proposal, which could yet be derailed, has yet to be agreed on.

Acquiring a minority stake could still allow Telenor to strengthen its presence in Asia while easing political concerns in Malaysia.

As we indicated in our past updates, the RM7 billion to RM 8 billion investment for fifth-generation (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 given that our channel checks with industry sources have indicated that the capex per sq km could be 10 times higher than 4G for selected locations. Over the past five to six years, we estimate, 4G capex spent by telcos has already surpassed RM15 billion to date in 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, resulting in suboptimal speeds and connectivity for 4G services. Evidently, a substantively higher proportion of fiberised mobile towers is needed to deploy 5G services.

But the MCMC has highlighted that telcos’ capex spending trend has been declining, currently below the industry average. Among the three main mobile operators, DiGi’s capex fell the most by 11% for the financial year ended Dec 31, 2018, Celcom by 6% and Maxis by 5%.

There is a potential rerating catalyst if the merger materialises given that synergies arise from the consolidation while mitigating competition among the cellular operators. We note that the share prices of telco stocks have appreciated recently due to a rising trend of collaboration among potential 5G mobile operators. However, pending further developments on this front, we maintain our “neutral” outlook for the sector for now given the still substantive 5G capex requirements against the backdrop of government-targeted fiberised average revenue per unit reductions under the National Fiberisation and Connectivity Plan. Our only “buy” currently is Axiata, given its low enterprise value to Ebitda valuations and rising prospects of monetisation of its multiple businesses. — AmInvestment Bank, Jan 20