PETALING JAYA: RHB Research Bhd has maintained a “neutral” rating on the local telecommunications sector pending greater clarity on regulatory risks, the retabling of Budget 2023 and outcome of mandatory standard and access pricing (MSAP) public inquiry.
The research outfit stated due to the uncertainty in the market place, its prefers fixed line service providers like Telekom Malaysia Bhd (TM) over mobile counters.
This is on expectations growth will be driven by demand for quality and reliable broadband connectivity including robust wholesale growth for 5G services as well as cost optimisation and enterprise digitalisation efforts such as the structural shift towards cloud services and managed services in financial year 2023 (FY23).
“On an aggregate basis, fixed line core earnings are projected to grow by about 14% in FY23 relative to mobile earnings growth of about 11%, as competition should remain tight for the latter despite the industry consolidation, with little contribution from 5G,” RHB Research stated in a report yesterday.
It added sector core earnings will also get a boost from the end of the one-off prosperity tax.
The local telco sector underwent a 10% de-rating in 2022 and underperformed the benchmark FBM KLCI by over 5%, due to the 5G policy uncertainties, the challenging earnings outlook and the inflationary pressures.
RHB Research noted mobile service revenue (MSR) should improve further with the normalisation of roaming and pre-paid usage this year.
China’s move to end its zero-Covid policy and open its borders would provide 2% to 3% year-on-year (y-o-y) growth in MSR with the pickup in international travel.
The return of migrant workers into the country and increased travelling activities contributed to the 0.7% quarter-on-quarter (q-o-q) uptick in industry MSR for the big three telcos in the third quarter of last year, but the impact was diluted by the expiry of the Jaringan Prihatin promotion which crimped prepaid revenue (minus 0.4% q-o-q).
Postpaid revenue ticked up by 1.8% q-o-q (plus 3.3% y-o-y) from continued pre-to-post migration, stronger average revenue per user and steady subs growth.
Contribution from 5G service is expected to be minimal in 2023 as mobile operators are at present offering 5G services at zero premium over conventional packages.
Meanwhile, Putrajaya’s move to review the rollout of the 5G model and tender process has elevated regulatory risk for the sector, at least until the end of the first quarter, when the government is set to make a final decision on the rollout.
RHB Research expects the government to continue with the Jendela Phase 2 (2023 to 2025) but the RM8bil budget allocated by the previous government in Budget 2023 may be reviewed.
The national digitalisation programme should benefit fixed line and telco infrastructure players, it stated.
Sector analysts will also have an eye out for the outcome of the MSAP review at the end of February as the industry regulator has proposed for a preliminary 41% to 52% decline in high speed broadband access prices (Layer 3) for the next regulatory period (2023 to 2025).
“We note that final access prices can still be higher than proposed prices following the public inquiry exercise.
“In the previous regulatory period (2018 to 2020), actual access prices were 159% to 283% higher than proposed,” RHB Research stated.
The research outfit noted the price of TM’s fixed broadband services fell 50% to 60% between 2018 and 2020 following the introduction of lower-priced plans.
Despite the above potential risk, TM (target price (TP) RM7.55 a share) remains RHB Research’s preferred large-cap pick, while OCK Group Bhd (TP 56 sen a share) is its top pick for small-cap exposure.
The research house wants greater clarity on issues like dividend payout following the merger of Celcom and Digi group (CDB) but warned the higher debt and RM200mil in merger-related costs could see CDB’s FY23 core earnings per share decline by 5.1% (excluding 5G wholesale cost).
CDB merger synergies are set to be back loaded as network integration is complex and will take time while the merged entity’s management has ruled out staff lay-offs, the RHB Research report noted.