Spectrum risks look more manageable now

by **Cals** Thu 04 Feb 2016, 07:59

Spectrum risks look more manageable now

By CIMB Research / The Edge Financial Daily | February 3, 2016 : 10:39 AM MYT

This article first appeared in The Edge Financial Daily, on February 3, 2016.

Telecommunications sector
Maintain neutral: The Malaysian Communications and Multimedia Commission (MCMC) said last night that the 900MHz and 1800MHz spectrum will be reallocated among Celcom Axiata Bhd, DiGi.Com Bhd, Maxis Bhd and U Mobile Sdn Bhd by August 2016, with full implementation by July 2017.

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The spectrum will be reallocated for a fee for a duration of 15 years. Nevertheless, the MCMC said it recognises that players need to have sufficient capital to introduce/expand services. The fee payment will also be in phases to allow telcos to continue rolling out their services and not pass on the cost to consumers.

Assuming that the MCMC distributes the spectrum evenly, a possible scenario is for the big three telcos to each get 2x10MHz of 900MHz and 2x20MHz of 1800MHz spectrum, with the balance going to U Mobile (900MHz: 2x5MHz, 1800MHz: 2x15MHz). This is a manageable scenario for the three telcos, with some capital expenditure (capex) required for network retuning and not-too-big spectrum losses for any of the players.

While reallocation fees are still being determined, the tone of the MCMC’s announcement suggests that it is likely to be closer to (if not lower than) the reserve price in the recent spectrum auctions in Thailand and Singapore, rather than the final price paid. Reserve prices in the two countries are about RM2.1 million to RM2.2 million for the 900MHz band, and about RM1.7 million to RM1.8 million for the 1800MHz band, on per MHz per million population basis.

Based on our distribution scenario above, Celcom/Maxis may have to pay RM1.7 billion each. Assuming an extra RM500 million to retune their networks and add more sites, the total RM2.3 billion will shave 3.9% off our target price (TP) for Axiata and 4.6% off Maxis. DiGi will have to fork out RM1.1 billion for the 1800MHz spectrum, which will reduce our TP by 2.7%. It will also have to pay RM647 million to attain the 900MHz, but this could be offset by capex savings given the spectrum’s wider coverage.

The MCMC will address the optimal usage of other relevant spectrum bands by year end.

If telcos are charged a fee to retain their existing 2100MHz and 2600MHz spectrum, it could cost an extra RM995 million each (based on Thai and Singapore reserve prices), or 1.7% off our TP for Axiata, 2% off Maxis and 2.6% off DiGi.

If our assumptions above (including 2100MHz and 2600MHz) materialise, our TPs for Axiata, Maxis and DiGi may be cut to RM6.47, RM6.26 and RM4.74 respectively. However, given the steep share price declines last week, it appears that Axiata’s and Maxis’ share prices may have overshot on the downside, and could be poised for a rebound on this latest announcement from the MCMC.

We stay “neutral” on the sector and keep our TPs for Malaysian telcos, pending the MCMC’s final decision on the exact spectrum reallocation and fees. Our current Malaysian telco top pick is Axiata. — CIMB Research, Feb 2