5G clarity may lift telcos off oversold position
? We raise our sector rating to Overweight. Maxis is upgraded to Add, with an
8% lower TP of RM3.60. TM stays our top Malaysian telco pick (RM6.75 TP).
? We believe telcos are oversold on 5G fears. Greater clarity on the 5G
situation may emerge in early-Jul and could be a re-rating catalyst.
? We believe there is now some upside and, given historical-low valuation,
telcos may also relatively outperform from hereon in a weak market.
Raise sector to Overweight & Add for Maxis; top pick is still TM
We raise the Malaysian telco sector’s rating from Underweight to Overweight. We think
the potential earnings hit from 5G wholesale fees are already more than factored in
telcos’ share prices, which have fallen by an average of 17% YTD. Maxis’ and TM’s DCFbased fair value (FV) in three possible scenarios are all higher than their current share
prices by 8-32% and 27-28%, respectively. Greater clarity on the 5G situation may
emerge in early-Jul and could be a potential re-rating catalyst, in our view. We upgrade
Maxis from Hold to Add, with an 8% lower TP of RM3.60 (higher risk-free rate), which is
still based on a 20% discount to its DCF-based FV of RM4.53 (ex-5G fees). We reiterate
Add on TM, with an unchanged DCF-based TP of RM6.75. Our earnings forecasts (ex-5G
fees) are unchanged, pending better clarity. Downside risk: delays in final resolution.
Scenario 1: Core EPS hit in FY22-24F but is more than priced in
We assume telcos sign 5G wholesale agreements with Digital Nasional Bhd (DNB) based
on its current offer, with no equity stakes in DNB. We estimate Maxis’ FY22-24F core
EPS to be hit by 1-19% and its DCF-based FV at RM3.57. Its EV/OpFCF is at the bottom
of its 12-year trading band even if we stretch this out to end-FY24F. With FCFE/share at
20-23 sen, we see Maxis sustaining its FY22-24F DPS at 20 sen p.a.; its 6.0% dividend
yield is at 0.8 s.d. above its 12-year mean and a decent 182bps above the 10-year
government bond yield. For TM, we estimate the net impact to its FY22F/23F/24F core
EPS at +4%/neutral/-7%, as it will also receive fibre lease revenue from DNB. Coupled
with 4G capex savings, its DCF-based FV is little changed at RM6.70.
Scenario 2: Rosier FY22-24F core EPS vs. Scenario 1
We assume telcos take up c.12% stakes each in DNB for RM200m and that wholesale
fees are charged based on actual traffic (instead of sites rolled out) in 2022-24F (reverting
to the Coverage and Capacity fee structure from 2025F onwards). We estimate Maxis’
FY22-24F core EPS to be hit by just 1-6%. However, its DCF-based FV is largely
unchanged at RM3.57, as the lower wholesale fee in 2022-24 is offset by the RM200m
investment in DNB. Maxis’ FY22-24F FCFE/share would be 20-25 sen, in our estimates.
For TM, we see FY22-24F core EPS boosted by 4-8% as fibre lease revenue from DNB
will now be much more than 5G wholesale fees. Its DCF-based FV would be the same at
RM6.75. If we assume DNB offers a 20% discount on wholesale fees for 2025F onwards,
Maxis’ and TM’s DCF-based FV would be higher at RM3.94 and RM6.95, respectively.
Scenario 3: Near-term jitters, but may not be worse in the longer run
We cannot fully rule out a potential new government (post-GE15) reviewing DNB’s SWN.
Any signs of this may cause jitters and keep telcos’ share prices depressed until full
clarity emerges. In the extreme case where Malaysia reverts to telcos rolling out their own
5G networks, Maxis’ FY22-24F core EPS may be hit by 0-6% and its DCF-based FV
would be RM4.37, including estimated 5G spectrum fees. TM’s core EPS forecasts and
FV may not be impacted as we do not expect it to roll out its own 5G network.
5G clarity may lift telcos off oversold position
Raise to sector Overweight & Add for Maxis; top pick
is still TM
Sector rating raised to Overweight as we think telco shares
are oversold
We raise the Malaysian telco sector rating from Underweight to Overweight. We
think the potential earnings hit from 5G wholesale fees have already been more
than factored into telcos’ share prices, which have fallen by an average 17%
YTD. In our analysis, Maxis’ and TM’s DCF-based FV in 3 possible scenarios
are all higher than their current share prices by 8-32% and 27-28%, respectively.
Greater clarity on the 5G situation could emerge by early-Jul
We believe greater clarity on the 5G situation may emerge in early-Jul, given
recent comments from the Communications and Multimedia Minister and press
reports. On 30 Jun, an Edge Markets report cited the Communications and
Multimedia Minister Tan Sri Annuar Musa saying that six local telcos have
agreed to take up the 70% stake in Digital Nasional Bhd (DNB; Unlisted) ahead
of the end-Jun deadline and that an official announcement will be made in
another 7-8 days. He also shared that everything is according to plan, and
issues pertaining to transparency and the pricing involved have all been sorted
out.
In addition, based on a Singapore’s Straits Times (ST) news report on 29 Jun,
its sources said that Malaysia’s Ministry of Finance (MOF) will inject RM500m for
its 30% stake, while each telco will cough up RM200m for an equal 11.7% stake.
In addition, a wholesale price review will be overseen by the Malaysian
Communications & Multimedia Commission (MCMC) every three years and the
wholesale pricing will be discounted until DNB achieves 80% nationwide
coverage by end-2024.
Greater clarity on the 5G situation could be a re-rating catalyst, in our view. Even
if telcos were to sign-up on DNB’s current wholesale terms, it would still help to
provide certainty and dispel fears over potentially even worse-case scenarios,
while more favourable outcomes could lead to more significant upsides, in our
view.
Upgrade Maxis to Add, with an 8% lower DCF-based TP of
RM3.60 (WACC: 7.6%); TM is still our top pick, with an
unchanged DCF-based TP of RM6.75 (WACC: 7.9%)
We upgrade Maxis from Hold to Add, with an 8% lower TP of RM3.60 (after
raising the risk-free rate by 50bps to 4.5%, owing to the recent rise in Malaysian
government bond yields), which is still based on applying a 20% discount to its
DCF-based FV of RM4.53 (ex-5G fees). We maintain Add on TM, with an
unchanged DCF-based TP of RM6.75 (already assuming a risk-free rate of
4.5%). TM is our top Malaysian telco pick as we view it is a beneficiary of the
structural demand for fibre, data centres and cloud services, and due to its
bigger upside potential. Our earnings forecasts are unchanged (i.e. excludes 5G
wholesale fees), pending better clarity.