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This article first appeared in The Edge Financial Daily on January 7, 2020

Telecommunications sector
Maintain neutral:
With the fifth-generation (5G) spectrum and preferred deployment model — a single infrastructure company owned by a consortium — now defined, the 5G capital expenditure risk could indeed begin to feature in the telecommunications (telco) sector in 2020.

Details are still lacking, but a possible outcome is for dominant telco companies — possibly the Big Three along with Telekom Malaysia Bhd (TM) — to group together to bid for the 5G spectrum. On a relative basis, our preferred sector pick is DiGi.Com Bhd with a “hold” call and a target price (TP) of RM4.80.

The regulator has designated the 700 megahertz (MHz), 3,500MHz and the 26 to 28 gigahertz (GHz) bands for 5G. It intends to award the initial allocation of the 700MHz (two x 30MHz) and 3,500MHz (100MHz) bands to a single entity — a consortium of licensees by the third quarter of 2020 (3Q20), with the commercialisation targeted for 1Q21. Details of the intended corporate structure and other relevant information for potential applicants would be announced in 1Q20.

Separately, four blocks of 400MHz in the 24.9GHz to 26.5GHz range are up for tender, while the existing allocation of 2,300MHz and 2,600MHz bands is to be maintained until December 2021.

With details as to what constitutes a consortium still lacking, it is difficult to pinpoint the potential winners and losers. A possible outcome, in our view, is for the existing dominant telco companies — possibly the Big Three along with TM — to group together given their common needs and balance sheet strengths. In such a scenario and depending on the eventual access requirements, smaller telco companies could be left out.

We have “hold” ratings on the telco stocks that we cover, as we view their risk-reward profiles as being merely balanced for now. Our preferred sector pick is DiGi (“hold”; TP: RM4.80) given its low propensity for negative earnings surprises along with a sector-leading dividend yield.

Notably, Axiata Group Bhd (“hold”; TP: RM4.30) has an earnings recovery thesis now potentially deferred to 2020 barring no further disappointments, after under-delivering on earnings for financial year 2019. — Maybank IB Research, Jan 2

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