KUALA LUMPUR (Feb 23): The government’s newly unveiled Malaysia Digital Economy Blueprint (MyDigital) is an overall boost to the prospects of the telecommunications sector, but the visibility of its impact on earnings is yet to be seen.  

Most analysts covering the sector agreed that the national initiative is positive as it will accelerate Malaysia’s progress to becoming a technologically-advanced economy. However, they are maintaining their "neutral" calls on the sector for now as execution risk remains a key concern.

Last Friday (Feb 19), Prime Minister Tan Sri Muhyiddin Yassin unveiled MyDigital, a 10-year roadmap to lay the foundations for the country’s transformation towards an advanced digital economy.

It will be implemented in three phases, with a few key investments to be made by both the government and private sector. This includes an investment of RM21 billion over the next five years through the National Digital Network (JENDELA) project to strengthen the existing connectivity.

The government will also invest RM15 billion via a special purpose vehicle over a period of 10 years for the purpose of a nationwide rollout of 5G, and will be given relevant spectrum to own, execute and manage the 5G infrastructure.

As for licensed telcos, they will be provided equal access to infrastructure, with an infrastructure cost-sharing structure that enables telcos to generate higher returns and, in turn, provide better and cheaper 5G services to consumers, Muhyiddin said.

“Telcos would benefit from the offering of additional services at lower cost of investment. Earnings impact may not be visible in the medium term but capex is expected to remain elevated,” PublicInvest Research analyst Eltricia Foong said.

UOBKayHian, meanwhile, said a cost-sharing single-infrastructure 5G model for Malaysia would naturally alleviate the capex burden of telcos and pave the way for sustainable dividend outlook.

“Telcos spent 11%-15% of service revenue to roll out nationwide 3G coverage, and 13%-16% of service revenue in the 4G era,” noted UOBKayHian.

However, it said a key risk for this sector includes heightened competition either through the proliferation of wireless communications services providers or disruption from the likes of U Mobile, Digi, RedTone and YES Communications.

CGS-CIMB Research added that any delay and cost-inefficient rollout would also be key risks, including difficulties in striking infrastructure leasing agreements with telcos.

The government has said a total of RM1.65 billion will be invested by several telcos to strengthen connectivity to the international submarine cable network until the year 2023. This, it said, will open up more space for faster and more stable international data transfer, thus lowering internet costs to consumers in Malaysia.

In light of that, analysts agreed that Telekom Malaysia Bhd (TM) is a key beneficiary given its global network of over 20 submarine cable systems and over 560,000km of fibre network across Malaysia.

“We raise our FY20-FY22 earnings forecasts for TM by 4% to 16% after factoring in higher data and internet revenue. Consequently, our discounted cash flow based target price is revised to RM6.80, as we have also raised our terminal growth rate to 2%,” said PublicInvest’s Foong.

TM together with Microsoft, Google and Amazon as cloud service providers (CSPs) have been given conditional approval by the government to manage and build hyperscale data centres and cloud services for the public sector.

With the government aspiring to have 80% of public data stored on the cloud by 2022 and to employ other cloud services to strengthen government services, TM, as the only home-based CSP, stands to benefit from the public sector’s recurring and growing revenue base, said Kenanga Research’s analyst Clement Chua.

"Moreover, the availability of 5G would also speed up adaptation of cloud applications in the private sector, providing potential further catalysts to TM’s data segment. TM’s enterprise and public segment (TM ONE) also yields the highest earnings before interest and taxes margin of 28% year to date within the group,” Chua said.

Read more stories on MyDigital here.