Kenanga IB Research retains neutral on telcos, TM top pick


Telekom HQ

KUALA LUMPUR: Kenanga Investment Bank Research is retaining its neutral outlook on the telecommunications sector as it expects the Big 3 to continue regaining postpaid market share, albeit to the detriment of their average revenue per unit (ARPUs).

In its research note on Friday, it said moving forward, telcos will look to drive growth through the enterprise and fibre-to-the home (FTTH) segments.

“We foresee Celcom Digi Bhd to achieve revenue synergies in FY24 at the earliest, ” it said.

Kenanga Research said Celcom Digi needs to: (i) consolidate networks and operations, and (ii) devise an effective dual-brand strategy.

“We estimate 5% net savings in FY22, as transition costs may weigh on cost savings. Our top pick is TM (outperform; TP: RM7), driven by: (i) net unifi subs adds, (ii) growth in content delivery network (CDN) and IRU, and (iii) wholesale leasing its fibre assets for 5G rollout and other’s FTTH offerings.

Maintain outperform on Axiata (TP: RM4.45) as we believe the current valuation does not fully account for the value accretion from Celcom Digi.

Maintain outperform on OCK (TP: 59 sen). Maintain market perform on Maxis (lower TP of RM4.70 from RM4.90) and market perform on Digi (post-merger-TP: RM4.25).

Celcom Digi revenue synergies.

On the mobile front, by combining Malaysia's fastest (Digi) and widest (Celcom) 4G networks, Celcom Digi could have the most desired 4G network in Malaysia.

Furthermore, CDB could leverage on each brand to target specific demographic/ geographic segments.

With a subscriber base of 19 million users, Celcom Digi would also have strong data analytics capabilities to cross-sell and up-sell its products.

“On the enterprise front, we think Celcom Digi will leverage on each other’s parents’ knowhow and pre-existing partnerships to develop 5G use cases. We also think the Celcom Digi Innovation Centre is a step in the right direction.

“That said, we think Celcom Digi can only reap the rewards of revenue synergies in FY24 at the earliest, as network consolidation and reshuffling of brand strategies take time, ” it said.

Kenanga Research said near-term synergies include: (i) lower network spend from running one network instead of two, (ii) lower procurement capex - less equipment and lower rates from greater bargaining power, and (iii) reducing number of physical stores.

Medium/long-term synergies include: (i) lower D&A expense, (ii) lower marketing and IT costs, and (iii) lower labor costs via voluntary separation schemes (VSS), which we think will be optional, given management’s stance on no forced retrenchments.

However, Celcom Digi will likely initially incur transition costs, including: (i) penalties for early termination of tower contracts - including those between Celcom and edotco, and (ii) VSS compensation.

“All in, we estimate 5% net savings in FY22, ” it said.

Kenanga Research said with Celcom Digi's "Day 1" likely to be some time in 3QCY22 (2QCY22 best case), it thinks the merged entity will use FY22 and FY23 to build the foundations of a merged entity.

“During this period, we think Celcom Digi may experience some loss of market share due to poor network quality/ customer service as Celcom Digi consolidates their network and operations.

“As Celcom and Digi's products and services are close substitutes, we think Celcom Digi needs to make good use of each brand to target specific demographic/ geographic segments, else they risk cannibalisation.

Its competitors will use this opportune time to target not only Celcom Digi 's mobile subs, but also enterprise and FTTH customers. Telekom Malaysia Bhd’s growth in content delivery network and IRU.

In 2019 and 2020, IRU (indefeasible rights of use) revenues declined as OTT customers opted to invest in their own submarine cables, thus reducing reliance on TM's submarine cables, reducing IRU revenues.

However, as data consumption spiked due to lockdowns, OTT customers have been returning to TM as of late 2020 as they require (i) extra capacity and (ii) redundancy capacity.

“With data consumption and transmission expected to grow due to 5G adoption, we expect TM to benefit from higher IRU revenues.

“Additionally, both (i) consumers' desire for and (ii) 5G-use cases' need for low latency should give TM's content delivery network a boost, given its ability to host the data closer to the consumer, ” it said.

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