KUALA LUMPUR (Sep 12): The spectrum refarming announced yesterday by the Malaysian Multimedia Commission (MCMC) could be negative for the telco sector, according to analysts who have remained "neutral" on the sector.

Spectrum refarming is the process of reclaiming assigned spectrum to reapportion it to applicants.

AllianceDBS Research said in a note today that the spectrum review would be generally negative for the big three incumbents but it has chosen to retain its sector rating at “neutral”.

Telco analyst Toh Woo Kim of AllianceDBS Research considered the move to be negative for the big three - Maxis, Celcom and Digi - citing high spectrum fees that could be imposed by MCMC.

“There are still risks of high spectrum fees imposed by the regulator or the result of a fierce bidding process. The MCMC has never chosen the auction route for spectrum allocation before, so we think a good gauge for spectrum price in Malaysia will be DiGi’s purchase of 3G spectrum which is about RM650 million back in 2007,” said Toh.

Toh said, among the incumbents, Digi is expected to be least affected as it owns very little spectrum in the coveted 900MHz Band.

“With low net gearing of only 0.1x net debt/EBITDA, DiGi could comfortably fund the potential spectrum cost without jeopardising its dividend commitment,” Toh said.

He placed a “hold” rating on both Axiata Group and Digi.com with target prices (TP) of RM7.15 and RM5.75 respectively while a “fully-valued” rating was placed on Maxis with a TP of RM5.80

Kenanga Research has similarly retained a “neutral” call on the sector, saying local mobile service providers would need to raise capital expenditures to expand network coverage.

“The country’s mobile capital expenditure per capita was just above RM100 (vs. RM340 in United States, where service providers are spending more capital on network improvements and for upgrading their wireless infrastructure),” said telco analyst Cheow Ming Liang of Kenanga Research.

Cheow retains Telekom Malaysia (TM) as his top pick with a TP of RM6.74 per share.

Cheow added that Digi (TP RM5.53) might see improvements in its earnings forecast in view of its superior performance against its peers.

On small caps for telco, Cheow selected Redtone (TP 77 sen) and said that he would raise its target price if the company managed to seal more data projects from the government.