KUALA LUMPUR (Jan 6): Hong Leong Investment Bank (HLIB) Research remains neutral on the telecommunications sector and still prefers fixed over wireless telecommunications network as they are the prime beneficiaries in broadband or 5G infrastructure deployment.

In a note on Friday (Jan 6), the research house noted that KL TEL fell 8% in 2022, which underperformed KLCI’s 5% loss as the sector was plagued by 5G regulatory uncertainties and Prosperity Tax impact.

It said its tactical strategy to favour fixed over wireless had served well as TIME dotCom Bhd was the only gainer (up 7%) and Telekom Malaysia Bhd (TM) experienced the smallest loss (down 2%) among peers and relative to the broader index.

HLIB said it maintains a "buy" recommendation on its favourite pick TM on the back of an unchanged discounted cash flow-derived target price of RM6.94.

“We are particularly positive on its cost optimisation measures which [are] now yielding an impactful outcome. Leveraging on its extensive fibre reach, TM is perceived to be the critical fundamental building block of government’s 5G rollout under MyDigital initiative.

“Furthermore, TM is well positioned as the sole Malaysian cloud service provider when sovereignty is the utmost [importance] in dealing with [the] government’s data,” it added.

Meanwhile, HLIB said the impact of the next Mandatory Standard on Access Pricing (MSAP) price revision, if any, is expected to be mild and likely to be offset by ever increasing consumption.

“Telcos’ dividend yields are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests.

“With the amalgamation of Celcom and Digi, we expect healthier market rivalry with [less] price undercutting for market share gain,” it added.

HLIB said it will stay the course for 2023 as the levy is one-off and 5G build-up will continue regardless of the political climate.

As such, it prefers fixed over wireless telcos given fibre’s role as backhaul to transfer data at the speed of light has become ever more critical and a mandatory pre-requisite in broadband/5G builds.

“Demand will spike not only in terms of capacity, but also coverage in order to compensate for 5G spectra (especially mmW) shortcoming in propagation.

“Surge in wholesale bandwidth demand will boost margins even under MSAP regime. Also, new fibre rollouts are commercially negotiated (price not regulated) and fixed telcos will command more lucrative returns,” it said.

It said dividend yields which average circa 3% are not attractive enough relative to risk-free interest rate to spur domestic and foreign buying interests.

HLIB expects the US dollar to be softer in 2023 averaging RM4.34/USD compared to 2022’s average of RM4.40/USD.

The softening greenback may lead to lower international direct dialling traffic costs and foreign debt financing.