LTE allocation to change telco landscape

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THE NEXT DRIVER: The remarkable growth of non-voice revenue or data has prompted expectations for telcos to introduce interesting product bundles in 2013 while the advent of LTE will help reduce network congestion and latency. — Bloomberg photo

The telecommunications (telco) sector is set for a re-rating and shift in equilibrium as the Malaysian Communications and Multimedia Commission (MCMC) has finally announced the allocation of the much anticipated 2.6 GHz spectrum band, paving the way for mobile subscribers to enjoy faster Long Term Evolution (LTE) services in the future.

The MCMC revealed that eight companies would be awarded the access to the spectrum band, namely Celcom Axiata Bhd (Celcom), DiGi Telecommunications Sdn Bhd (DiGi), Maxis Broadband Sdn Bhd (Maxis), Packet One Networks Sdn Bhd (P1), Puncak Semangat Sdn Bhd (Puncak Semangat), REDtone Marketing Sdn Bhd (REDtone), U Mobile Sdn Bhd (U-Mobile) and YTL Communications Sdn Bhd (YTL).

In anticipation of the announcement, every mobile operator had indicated earlier that its network was ready to deploy LTE services when the 2.6GHz spectrum was being finalised by the MCMC, according to Cheow Ming Liang from the research division of Kenanga Investment Bank Bhd (Kenanga Research)

The analyst stated, “While the exact allocation of the spectrum bandwidth has yet to be revealed, we believe the final allotment will come in close to our prediction.

“Thus, a potential infrastructure collaboration agreement among either Celcom and DiGi or Celcom and Puncak Semangat is expected to be initiated in the near future,” he opined.

The MCMC indicated that the existing service providers might use the 2.6GHz spectrum allocation to further expand and enhance the capacity of their mobile broadband networks while the newcomer (Puncak Semangat) was expected to bring fresh ideas and innovations to the market.

“MCMC expects the service providers to enter into more smart partnerships and sharing agreements (that is infrastructure sharing to further reduce the duplication of physical transmission to towers) while providing 4G wholesale MVNO (Mobile Virtual Network Service) to other service providers that do not have the access to the spectrum.

“Should the actual spectrum bandwidth allocation be similar to our prediction, we believe that either Celcom and DiGi or Celcom and Puncak Semangat could potentially enter into a smart partnership and sharing agreement in the future to enhance their spectrum efficiency and compete with the Maxis team,” Cheow said while pointing out that REDtone and U-Mobile had already teamed up with Maxis earlier.

Lion’s share?

(Source: Bloomberg, Kenanga Research)

OSK Research Sdn Bhd analyst Jeffrey Tan said that the names of the winners did not come as a surprise although “we would have preferred bigger blocks of the spectrum to be allocated to a smaller number of recipients.”

“Despite being a new kid on the block, Puncak Semangat, a company controlled by Tan Sri Syed Mokhtar al-Bukhary, was selected while Asiaspace was dropped as expected.

“While the MCMC’s announcement lacks details, we gather from industry sources that Puncak Semangat has obtained the lion’s share of the spectrum, at 40MHz versus the 20MHz allocated to the other seven recipients.”

Meanwhile, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expected that the telcos would be introducing its LTE services by the first half of 2013 but it expected rollout would be limited to within Klang Valley initially.

“We do not foresee any delay in the roll out as telcos have begun network modernisation since 2011 and would have been well prepared for the eventual spectrum award.”

“The expected launch of LTE will provide excitement for the sector in 2013. However, we do not expect LTE to have an immediate impact on telcos earnings. We believe that most of the sector’s potential, including LTE has been priced in.”

Data is next driver

MIDF Research stated that the growth of non-voice revenue or data had been ‘remarkable’ as combined non-voice revenue for Maxis, Celcom and DiGi grew 8.5 per cent year-on-year in the first nine months of financial year 2012 (9MFY12).

Revenue also increased by one percentage point to 37.2 per cent in that same period, it pointed out.

“However, the question beckons on how to monetise the data demand. We expect telcos to introduce interesting product bundles in 2013 inclusive of prepaid packages.

“With data revenue becoming the operators’ main growth impetus, LTE will help reduce network congestion and latency.

“The ‘side effect’ of higher data usage is its pressure on the (EBITDA) earnings before interest, tax, depreciation and amortisation margin.

“However, efficient data revenue capture and possible lower interconnect fee may ease the strain. We expect EBITDA margin to be maintained around the 45 to 48 per cent level,” it said of the sector.

MIDF Research continued to be upbeat on the sector given “its positive outlook especially on LTE, its characteristics of stable recurring revenues that are largely seen to be recession-proof, and its defensive qualities.”

“However, we believe that most of its potential, including LTE has been priced in,” it concluded.

Meanwhile, Cheow made no changes to Kenanga Research’s financial years 2013 to 2014 (FY12 to FY14) earnings forecasts for telco companies under its coverage.

OSK Research’s Tan opined, “While the advent of LTE may give rise to intensifying competition, we think the operators will act rationally and focus on service quality.”