KUALA LUMPUR (March 21): RHB Investment Bank Bhd has maintained it “neutral” stance on the telecommunications (telco) sector, naming Telekom Malaysia Bhd (TM) and OCK Group Bhd as its top picks.
The research house has “buy” calls for both stocks, with a target price of RM6.20 for TM, and 60 sen for OCK, according to a note it released on Tuesday (March 21).
“We continue to prefer fixed line players, owing to their more discernible catalysts and structural drivers,” analyst Jeffrey Tan said in a note.
“We also like OCK for its strategic exposure to 4G/5G site deployments and its undemanding valuation,” he added. OCK shares were flattish at 42 sen at 10.55am, while TM stood at RM4.86 a share.
The analysts noted that the recently concluded reporting season saw fixed line core earnings growth of 27% year-on-year (y-o-y) in the fourth quarter of 2022 (4Q2022), thumping the mobile segment’s 16.2% y-o-y.
“Most telcos delivered in-line results, with Axiata Group Bhd outperforming for the consecutive second quarter,” he said.
However, aggregate fixed line revenue fell 3.4% quarter-on-quarter (q-o-q) and 5% y-o-y in 4Q2022, mainly due to lower indefeasible rights of use sales and international voice revenue at TM.
“Meanwhile, overall industry 2022 revenue grew 6%, with sustained double-digit revenue growth at TIME dotCom Bhd,” he said.
He views that mobile service revenue should see further improvements, after it grew 2.3% y-o-y in 4Q2022 or 0.9% q-o-q. The y-o-y growth was the strongest since the pandemic.
“We see further recovery in 2023 (low single-digit growth) from stronger roaming and prepaid revenues (higher migrant traffic).
“Economic headwinds, however, should continue to temper industry average revenue per user (Arpu), with tactical promotions targeted at the lower-end or price-sensitive segment,” he said.
On CelcomDigi Bhd (CDB), the analyst noted that the network’s request for proposal process had concluded, with the terms being finalised, which should pave the way for the commencement of site integration works.
“CDB plans to shut-down 6,000 to 7,000 sites of over 23,000 nationwide over 18 to 24 months. The guided integration synergies — net present value of RM8 billion over five years — are likely to be backloaded in our view, as operating expenditure and capital expenditure should remain elevated in 2023 from merger-related costs,” he said.
Meanwhile, the new access price framework, which came into effect on March 1, saw Layer 3 service gateway prices decline by 51% to 65%, versus the initial 41% to 52% decline proposed by the regulator in its public inquiry paper.
“We expect discussions with fibre wholesale access seekers on new commercial agreements to complete by mid-year.
Previously, the research house assumed a 5% to 10% impact on TM’s unifi Arpu for 2023-25 from lower access prices.
“We see the current 5G roll-out by Digital Nasional Bhd continuing as population coverage has surpassed 50%, albeit with refinements to the operating model, which could translate into lower wholesale cost for telcos,” he added.
Among the key risks to its call include competition, weaker-than-expected earnings, as well as regulatory and policy upheavals.