IN light of the pending finalisation of the Reference Access Offer (RAO) with Malaysian telcos agreeing to take stakes in Digital Nasional Bhd, Hong Leong Investment Bank (HLIB) Research is of the view that its tactical strategy to favour fixed over wireless has served well.
This is given that both its top picks – Telekom Malaysia Bhd (TM) and TIME dotCom Bhd – are experiencing smaller losses relative to the broader Bursa Malaysia Telecommunications & Media index which fell 13% in 1H 2022, hence underperformed the FBM KLCI’s 8% loss given the sector was plagued by 5G regulatory uncertainties and the prosperity tax impact.
“In this hawkish environment, telcos’ dividend yields which average circa 4% are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests,” opined analyst Tan J Young in a 2H 2022 outlook for the telco sector.
“Foreign shareholdings have been stagnant with more apparent sell-off observed in TM.”
Against such backdrop, HLIB Research reiterated its “neutral” outlook on Malaysia’s telco sector with preference for wired over wireless. Its two top picks are TM (“buy”, target price: RM7.23) and TIME dotCom (“buy”; TP: RM5.37).
Justifying that fibre is king, HLIB Research reasoned that its role as backhaul to transfer data at the speed of light has become ever more critical and a mandatory pre-requisite in broadband/5G build-ups.
“Demand will spike not only in terms of capacity but also coverage in order to compensate for 5G spectra (especially mmW) shortcoming in propagation,” the research house pointed out.
“Surge in wholesale bandwidth demand will boost margins even under MSAP (mandatory standard on access pricing) regime. Also, new fibre roll-outs are commercially negotiated (price not regulated) and fixed telcos will command more lucrative returns.”
Amid firmer greenback averaging RM4.30/US$ compared to 2021’s average of RM4.14/US$, HLIB expects this to lead to higher IDD traffic costs and foreign debt financing. “(As such), TIME dotCom’s global bandwidth sale and leasing proceeds will be higher as majority are dominated in US dollar,” noted the research house.
Elsewhere, given the interest rate hike situation, HLIB Research has lowered Maxis Bhd DCF (discounted cash flow)-derived target price to RM3.19 (from RM3.96 previously) after adjusting its weighted average cost of capital (WACC) from 6.1% to 7.1% and terminal growth (TG) of 0.5%.
“Maintain “hold” on Maxis. For the same reason, we also lower Axiata Group Bhd’s SOP (sum-of-parts)-derived target price from RM4.49 to RM2.81,” added HLIB Research. – July 20, 2022
