Malaysia Telcos:Realigning the playing field-160203

MCMC proposes spectrum reallocation on 900/1800 bands

    Pricing still unclear; we run scenarios based on Thai auctions

    Maintain sector cautious view but upgrade Maxis to Hold (fromReduce) on valuation with unchanged estimates/TP

    MCMC moves on spectrum. The Malaysian telecoms regulator, MCMC hasannounced spectrum reallocation in 900Mhz and 1800Mhz bands by August 2016.Spectrum would be reassigned to only 4 telcos - Celcom (Axiata), DiGi, Maxis andUMobile for a period of 15 years, and full implementation is targeted by 1 July 2017.MCMC will also be addressing the reallocation of other spectrum bands such as700MHz, 2300Mhz and 2600Mhz by end-2016. Similar to the 2100Mhz spectrumauctions, payment will be made in phases with annual spectrum maintenance fees.

    DiGi and uMobile benefit most. DiGi’s press release on 2 Feb 2016 suggests that ithas been allocated 2x5MHz of 900Mhz and 2x20Mhz of 1800MHz for 15 years.Maxis press release dated 2 Feb 2016 suggests that it has been allotted 2x10Mhzand 2x20Mhz respectively in the 900Mhz/1800Mhz bands. Celcom has announcedtoday that it has been allotted 2x10Mhz on 900Mhz and 2x20Mhz on 1800Mhz.Assuming these allocations play out, DiGi and uMobile should benefit most givenhigher holdings in 900Mhz, which mean greater capex/opex efficiency and betternetwork capacity that allows them to compete better on data pricing going forward.

    Pricing still unclear; we expect a payout of MYR1.5-1.8b. Given no clarity onpricing, we use data from the recently concluded Thai auctions in 900Mhz and1800Mhz and note that the reserve price / Mhz / capita came in at USD0.49m.Assuming a similar reserve price for Malaysia at MYR2m per Mhz /capita ourreallocated scenario translates into a range of MYR1.5-1.8b for the 4 telcos.

    What could go wrong – and right. The current regulatory release suggests that thisis a spectrum reallocation, so elevated prices based on competitive bids could wellmake it worse. On the positive side, operators expect the MCMC to be reasonable onpricing, with Axiata expecting a total potential impact of MYR1-2b, even afterassuming no additional spectrum is made available. There is also 70MHz ofspectrum in 700Mhz to be distributed post analog TV switchover (2 year timeframe).

    Maintain cautious view. All telcos are still reviewing their spectrum reallocations.Axiata stands to lose out on spectrum reallocations, but it has great flexibility ongearing (XL tower sales, shareholder loan repatriation, edotco tower listing). Maxiswill likely be the most affected with its higher gearing levels and has corrected -12.7%absolute,-14.9% vs. index in 1 week . We upgrade the stock to a Hold (from Reduce)on a more reasonable valuation with unchanged estimates/ target price.