KUALA LUMPUR (June 4): AffinHwang Capital Research has upgraded its call on the telecommunications (telco) sector to a Neutral, from Underweight previously.

The research house said Maxis Bhd is its relative preference for its superior network infrastructure, positive 2021-22E earnings outlook, and first-mover advantage in developing converged solutions for individuals, homes and businesses.

In a note, the research house said that strong market liquidity, lower funding costs and firm investor demand for well-managed telco companies that are classified as essential businesses should support the valuations of telcos.

“As such, we revisit our valuation metrics and lower the WACCs (or increase the earnings multiples) for the telcos and upgrade Telekom Malaysia Bhd (TM), Maxis, and Digi.Com Bhd to Holds (from Sells). We maintain our Sell call on Axiata Group Bhd for its challenging business outlook and high policy/market risks for its overseas operations,” it said.

Meanwhile, it said DiGi’s 2021 to 2022 expected earnings outlook remains uninspiring, its higher yield (the highest among the telcos covered by the research house) should make up for the relatively muted earnings prospects. DiGi.Com has been upgraded to Hold with a higher target price (TP) of RM4.60, from a Sell call and RM3.80 TP.

TM’s weak earnings outlook in 2020 to 2021 is compensated by its extensive fibre network, which is a core piece of infrastructure needed for the development of 5G networks in Malaysia. TM has been upgraded to a Hold call with a TP of RM4.60, from a sell call with an RM3.55 TP.

However, the research house maintained its sell call on Axiata Group Bhd, albeit with a higher TP of RM3.40, from RM2.55 previously. AffinHwang Capital said that it is cautious on Axiata’s overseas operations, forecasting Covid-19 and lockdowns to have a larger operation and earnings implications for its overseas operations vis-à-vis Malaysia. Furthermore, with a price to earnings ratio (PER) of 41 times in 2021, Axiata’s valuation is the priciest among the Malaysian telcos the research house covers.

Sector earnings are expected to decline by 15% in 2020 and recover by 2% to 4% per year in 2021 and 2022. The research house also expects the second quarter of this year (2A20) to be the weakest quarter for cellular network companies (cellco) in anticipation of a decline in average revenue per user (ARPU), particularly in the prepaid segment and a lower subs base.

“The cellcos are offering free data of 1 GB/day during the MCO/CMCO period, which should lead to lower top-ups during this period. Elsewhere, the lockdowns in several South Asian countries are affecting Axiata’ business operations as the prepaid users face logistical challenge reloading their prepaid cards and procuring new SIM cards.

Also, the weakening regional economies may have a relatively larger impact on these countries and affecting their consumer spending more pronouncedly than the Malaysia market. Separately, we expect TM’s retail business to be relatively resilient during the MCO/CMCO period but lower government and business spending and higher competition (from Maxis) may affect their overall profitability in 2020E,” it said.

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