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Stronger Fixed-line Growth To Offset Lockdown Impact

2Q21 sector earnings grew 23% yoy and 10% qoq given Axiata’s recovery and strong fixed broadband take-up. Most telcos’ earnings were in line, except for TM’s due to VSS provisions. Post results, we trim sector earnings by 2% to account for TM’s VSS provisions into 3Q21. Expect a 9% yoy sector earnings recovery for 2021. 3Q21 lockdown
may lead to rising bad debt risk, but expect it to be offset by stronger fixed-line growth with an expanded fibre footprint. Maintain MARKET WEIGHT. Top picks: TM and Axiata.

WHAT’S NEW

• 1H21 results largely in line with expectations. The telecommunications sector’s 2Q21 earnings grew 23% yoy and 10% qoq to RM1,451m, driven mainly by Axiata’s five-fold earnings jump given higher revenue contribution across all opcos (except Ncell) and narrowed losses from Axiata Digital Services (ADS). This was partly offset by a 23% yoy and 5% qoq
earnings weakness in Telekom Malaysia (TM) – below estimates – amid the provisions for its Voluntary Separation Scheme (VSS). The sector’s 1H21 earnings of RM2,774m represent a 12% yoy improvement, accounting for 52% of our full-year earnings forecast. Post 2Q21 results, we trim 2021 sector earnings marginally by 2% to account for higher staff cost in TM as management alluded that the VSS programme will continue into 3Q21.

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• Big 3 saw improved earnings (+3% yoy, +17% qoq) in 2Q21 on the back of: a) a 6% yoy and 1% qoq growth in prepaid revenue, and b) the government’s Jaringan PRIHATIN programme which saw a stronger take-up of postpaid and mobile bundles. This resulted in the Big 3’s service revenue growing by 4% yoy and 1% qoq. The strong sequential earnings for Celcom was due to the absence of hefty accelerated depreciation from 3G sunsetting booked
in 1Q21.

• Fixed-line operators to drive 2H21’s earnings growth. Fixed-line operators saw a 2% yoy and 17% qoq decline in 2Q21’s earnings, mainly dragged by TM’s VSS provision. Positively, both TM and TIME saw strong performance in fixed broadband revenue as a result of expanded fibre footprint via the JENDELA initiative. TM’s UniFi broadband revenue rose 10% yoy and 2% qoq with its subscriber base surging 38% yoy and 10% qoq. TIME’s retail revenue jumped 30% yoy and 5% qoq. We expect this trend to continue into 2H21 amid accelerating fibre rollout (via JENDELA).

• Expect 2021 sector earnings to grow 9% yoy to RM5,230m. We expect a seasonally weaker 2H21. This is predicated on: a) weak consumer and business sentiment – likely to improve only in 4Q21, b) TM’s continued VSS provision in 3Q21, and c) typically higher opex for Axiata and TM towards 4Q21, which will see tail-end of 3G accelerated depreciation for Celcom. All in all, we expect 2021’s earnings growth to be driven by: a) a 9% yoy top-line growth from fixed-line players, (including higher data centre revenue from TIME), b) 2% service revenue growth from Big 3, c) stable EBITDA margin, and d) increased enterprise solution orderbook, particularly for TM¸ which is likely to materialise in 4Q21.

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ACTION

• Maintain MARKET WEIGHT on the sector. We prefer fixed-line players over wireless players as favourable government initiatives for accelerating fibre works bode well for TM and TIME. We expect fixed-line operators to fare better than mobile operators in 2021 given strong subscriber growth trajectory. Our top picks are TM for its good growth prospects and Axiata for its depressed valuation and it being a proxy for regional reopening plays. The sector is trading
at 7x FY21F EV/EBITDA (0.6x SD below its five-year mean EV/EBITDA of 7.5x) and 25x FY21F PE.