KUCHING: The Malaysian telecommunication sector will likely be seeing various events occur with the most important being a spectrum re-farming exercise, in addition to escalating competition in the mobile segment, U Mobile Sdn Bhd (U Mobile) as an upcoming newbie in the Bursa Malaysia and the high speed broadband (HSBB) 2 project expected to gain more traction to Telekom Malaysia Bhd (TM).
The research arm of Kenanga Investment Bank Bhd’s (Kenanga Research) recent check with the industry players suggested that MCMC is now taking on a more active approach in reviewing the country’s lower-end 2G/3G spectrum – the 900 megahertz (MHz) band.
“Meanwhile, we also understand that industry players intend to urge the regulator to re-farm the 700MHz band (which is currently utilised for TV broadcasting) when the re-farming exercise takes place,” it said.
While the exercise could potentially lower the allocation for the big cap telcos, Kenanga Research noted that impact on earnings is expected to be minimal.
The research arm further noted that potential beneficiaries for these spectrums under the re-farming exercise will be DiGi.Com Bhd (Digi), U Mobile and some other smaller players given their relatively lesser spectrum in those frequencies.
Following the aggressive network expansion plan launched by U Mobile and TM’s mobility plans (via P1), Kenanga Research said that the competition in the mobile segment is expected to intensify further from the second half of 2015 (2H15) onwards.
“While the competition remains placid for now, we do not discount that the late comers could potentially use aggressive pricing strategy to gain market share,” it said.
The research arm noted that the battle, however, is not expected to trigger a price war given that the top three cellcos are still targeting to maintain their absolute earnings before interest, tax, depreciation and amortisation (EBITDA) or sustain their margins (at previous financial year) in financial year 2015 (FY15).
On U Mobile’s potential entry into Bursa Malaysia, Kenanga Research said that despite the absence of definite answer as to when the telecommunication services provider will float its shares, the market has persistently speculated the company will seek for public funding following the announcement of an aggressive RM1.5 billion network expansion plans for the year 2015.
While the listing roadmap is still very much vague at this juncture, the research arm estimates that the group’s market capitalisation could potentially be worth up to RM861 million to RM18.5 billion range (based on the book value and mobile subscriber’s market share methodology), with the former valuation method appearing to be more realistic in its view.
Meanwhile, it also does not discount that there could be some interesting corporate exercises in the making with Redtone International Bhd (Redtone), in view of their common major shareholders.
As for the HSBB 2 project, Kenanga Research said that it is expected to gain more traction to TM over the short-to-mid-term.
“Although the details of the HSBB 2 project has yet to be ironed out, we understand from the management that there is a strong data demand outside the high economic impact areas,” it said.
Thus, the research arm does not discount that the HSBB 2 project could potentially mirror the HSBB 1 project performance, which led TM’s Internet segment turnover to surge 81 per cent to RM2.99 billion in FY14 from RM1.65 billion in FY10 (where the group’s Unifi service debuted after a 1.5-year product gestation period).
Capital expenditure-wise (capex-wise), it noted that should the HSBB 2 project, which is classified under the public-private partnership (PPP) arrangement, duplicate the HSBB 1 structure, TM could potentially need to allocate RM1.4 billion capex (or 79 per cent out of the RM1.8 billion) for the project.
All in, Kenanga Research reiterated its ‘neutral’ call on the telecommunications sector while making no changes to its earnings estimate for all the telcos under its coverage.
The research arm continues to like DiGi.Com Bhd – ‘outperform’ rating for the group’s higher operational efficiency and better competency in monetising data.
It reiterated its ‘market perform’ rating on TM.
Meanwhile, Kenanga Research maintained its ‘market perform’ ratings on both Axiata Group Bhd and Maxis Bhd and keep the ‘accept offer’ call on Redtone albeit that it believes the long-term shareholders should hold the shares and wait for the catalysts to emerge.