This article first appeared in The Edge Financial Daily, on June 23, 2016.

Telecommunications Sector
Maintain “neutral” call: Look out for the Malaysian Communications and Multimedia Commission’s announcement for the new spectrum fee pricing for the 900mw  and 1,800mw bands, which have been reallocated among the four main licence holders. Our channel checks indicate that the announcement, which is expected to be made by August this year, may be delayed by ongoing discussions with industry players.

We understand that there is also a possibility that the reallocations of the 700MHz, 2,300MHz and 2,600MHz bands, expected by the end of this year, may also be postponed. In Singapore, the spectrum auction for the 2x10mw of 900MHz band and 40MHz in the 2.3GHz earmarked for a fourth telco operator has been delayed by six months to third quarter of calendar year ended 2016 (3Q16).

Impact estimates are premature at this stage, given that the spectrum assignment fee may be staggered over a longer period, which could partially mitigate the full quantum. The current Apparatus Assignment fee structure, which is based on raw site and equipment numbers, translated into RM70 million for Maxis, Celcom and Digi in 2015. Recall that Thailand’s four operators paid an average US$1.18 (RM4.75)/MHz per capita for the 900mw and 1800 MHz auctions late last year. However, Singapore’s Infocomm Development Authority has set a reserve price of S$35 million for 60MHz in the 900MHz band or just US 10 cents/MHz per capita to entice a fourth celco operator in February this year.

Assuming the fee is spread evenly over a baseline five-year assumption, we estimate that a fee of US 10 to 15 cents/MHz per capita could have a wide range in reducing financial year ended 2017 (FY17) forecast earnings, by 3%-29% for Maxis, but slightly lower at 2%-24% for Digi with its lower frequency allocations and 2%-19% for Axiata, which has significant overseas earnings contributions.

While no indication has been given on the spectrum fee-setting methodology during Axiata’s 1QFY16 results briefing, its managing director/group chief executive officer Tan Sri Jamaluddin Ibrahim has hinted that the impact could be better than their earlier expectations.

The domestic cellular communications sector remains mired in intense competition in both prepaid and postpaid segments as the current three incumbents struggle to fend off inroads made by U Mobile, upcoming webe (renamed from P1) and other mobile virtual network operators. This is highlighted in the continuation of mobile revenue contraction, lower average revenue per user amid ongoing contraction in voice and SMS usage during the 1QFY16 results. Although earnings before interest, taxes, depreciation and amortisation margins held steady in 1QFY16, they are likely to face pressure going forward, as top-line growth prospects remain flat amid rising costs from 4G capital expenditure rollouts and additional spectrum fees.

Worries regarding the UK’s possible exit from the European Union (EU) appear to be diminishing. However, should such an event occur from the referendum today, we expect significant long-term depreciation in the pound and euro. Nevertheless, there will be insignificant earnings impact on Malaysian telcos as capital equipment costs and international call  rates are wholly denominated in US dollars. Additionally, other than interconnection charges, none of the Malaysian telcos have any direct operations in the UK or EU.

The sector remains “neutral” given the ongoing intense mobile competition amid uncertainties from the new spectrum repricing structure. We reiterate a “buy” on Axiata on stronger contributions from overseas businesses, propelled by the value-accretive NCELL acquisition in Nepal, together with support from domestic roaming arrangement for high-speed broadband and backhaul collaboration with Telekom (TM). Our “hold” calls for Maxis, Digi and TM are maintained. — AmInvestment Bank Research, June 21