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This article first appeared in The Edge Financial Daily on April 5, 2019

Telecoms sector
Maintain neutral on respective sectors:
Indonesia’s Communication and Information Minister Rudiantara supports industry consolidation. The ministry, acting as facilitator and accelerator, plans to provide support by allowing an acquiring telco to retain the spectrum of the acquired telco. The government may provide additional incentives by allowing the merged telco to temporarily return surplus spectrum to the government, thereby helping the merged telco to reduce spectrum usage fees. The minister intends to implement the new spectrum-retention regulation by the end of 2019. Elsewhere, Rudiantara is firmly against the proposal to implement a floor price on telco services.

After a difficult 2018, Indonesian telcos have started to raise their cellular package prices. Representatives from all the companies we met (Telekomunikasi Indonesia, XL Axiata, Indosat) expect cellular prices to recover gradually this year. For 2019, the telcos are focusing on expanding their networks and improving service quality, instead of price competition. Separately, all companies are supportive of sector consolidation.

We came away from our visits with a mixed feeling. While we are positive on the minister’s supportive initiatives and corporates’ openness to consolidation, the pricing and control remain a major hurdle. Without consolidation, the competition should continue to cap their cellular prices and the sector’s service revenue growth. We maintain our “hold” rating on Axiata, the major shareholder of XL Axiata, with an unchanged sum of the parts (SoP)-derived target price of RM4.09. We expect XL Axiata’s earnings to recover from a dismal 2018. While we expect gradual revenue gains in its key operating subsidiaries (including XL Axiata), the stiff competition and regulatory risks may continue to cap earnings growth and weigh on investor sentiment. — Affin Hwang Capital, April 4

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