Potential spectrum farming opens up new threats

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Telecommunications Sector
It was reported that the Malaysian Communications and Multimedia Commission (MCMC) plans to review and refarm 2G spectrum on the 900MHz and 1800MHz frequency bands. Methods of implementation could include auction, beauty contest, or a combination of both.

The regulator’s aim is reportedly to rebalance the spectrum allocation and narrow the gap between big and small players.The 2G spectrum on 900MHz and 1800MHz is currently held by the Big Three incumbents — Maxis Bhd, Celcom Axiata Bhd and DiGi.Com Bhd. As such, they stand to lose if there is a refarming, regardless of the outcome.

At best, if those spectra are retained by the Big Three, there is still the risk of high spectrum fees imposed by the regulator or as a 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.Com’s purchase of 3G spectrum (2x15MHz in the 2100MHz band) for about RM650 million back in 2007.

UMobile, YTL e-Solutions Bhd and Puncak Semangat Sdn Bhd are potential threats as they are backed by financially strong parents. So they could put up competitive bids to rival incumbents.  For UMobile, securing additional spectrum would strengthen its position as an aggressive fourth player in Malaysia.

DiGi.Com (“hold”, target price [TP]: RM5.75) would be the least affected as it owns very little spectrum in the coveted 900MHz band. In fact, the company is keen to acquire the low frequency spectrum to compete effectively with Maxis and Celcom. With low net gearing of only 0.1 times net debt to earnings before interest, taxes, depreciation, and amortisation (debt/Ebitda), DiGi.Com could comfortably fund the potential spectrum cost without jeopardising its dividend commitment.

For Maxis (“fully valued”, TP: RM5.80), we see further risks to dividend payouts  given that gearing is approaching its limit of two times net debt/Ebitda. — AllianceDBS Research, Sept 12

This article first appeared in The Edge Financial Daily, on September 15, 2014.