Telecommunications sector: Underweight

CGS-CIMB RESEARCH (JUNE 7): We have an “underweight” rating on the Malaysian telecom sector. Pending the conclusion of negotiations on Digital Nasional Bhd’s (DNB) stake sale and signing of wholesale access agreements, we think telcos’ share price performance may continue to be lacklustre as investors will be concerned about potential negative outcomes. A deadline of end-June has been set, but given the complexity of the issues, there is a risk that it may have to be extended.

We see the Big Three’s (Celcom, Digi, Maxis) mobile service revenue growing by low single digit year on year in 2022F (2021: +1.3%), due to a gradual recovery in roaming and migrant/tourist prepaid SIM sales as Covid-19 abates, partly offset by a fall in revenue boosted by Prihatin-led initiatives in 2021. Competition may also be more stable in 2022F, with potentially stronger consumer purchasing power and the Celcom-Digi merger alleviating some pricing pressure. However, we do not expect major market repair, as U Mobile will likely want to keep growing its revenue scale to achieve sustainable net profits/decent returns on equity, while the Big Three may continue to engage in sub acquisition/retention initiatives in a mature mobile market.

We are more positive on the revenue growth for the fixed business due to structural demand and relatively more benign competition. Key upside risks to our sector rating include mobile network operators taking up equity stakes in DNB at fair valuations and are able to lower the total 5G rollout costs as well as reduce 5G wholesale fees. TM remains our top Malaysian telco pick, while we have a “hold” on Maxis.

We project TM’s revenue to rise further, driven by robust demand for fibre broadband (still relatively low penetration, further supported by TM’s accelerated fibre rollout); wholesale fibre leasing (for mobile backhaul and wholesale high-speed broadband access); and data centre/cloud services (thanks to over-the-top firms locating their content locally and cloud migration of public data under MyDIGITAL).

Despite its accelerated fibre rollout plan, we expect TM’s total operational expenditure to rise marginally in FY22-24F, buffered by cost-saving initiatives, mainly from its IT transformation programme, natural staff attrition and voluntary separation schemes, more efficient operations and maintenance cost, and contract renegotiations with vendors. We see its core EPS falling 4.1% y-o-y (cukai makmur), before rebounding 37.6% in FY23F (post-cukai makmur) and rising a further 6.8% in FY24F (ex-cukai makmur: +9.4%/+20.7% y-o-y in FY22F/23F), which is a potential rerating catalyst. TM’s FY22F EV/OpFCF (enterprise value over operating free cash flow) of 8.8 times is 29% below the mobile average, with decent FY22-24F yields of 3.6% to 5.2% per year (60% payout).

We see Maxis’ FY22F core EPS sliding 3.8% (cukai makmur), before rebounding 18.8% in FY23F (post-cukai makmur, full recovery in roaming and migrant/tourist prepaid SIM sales), and rising 10% in FY24F. Ex-cukai makmur, core EPS would rise 8.9%/5.2% y-o-y in FY22F/23F. There is risk of our FY22-24F core EPS being 2.9% to 24.5% lower if the government proceeds with its 5G single wholesale network (SWN) plans based on the current commercial wholesale offer. Its FY22F EV/OpFCF is 1.5 standard deviation below its 12-year mean, with reasonable FY22-24F yields of 5.6% per year.

Tenaga Nasional Bhd

Target price: RM9.30 HOLD

MAYBANK INVESTMENT BANK RESEARCH (JUNE 7): We believe the government will likely uphold Tenaga’s pass-through mechanism for 2H22. Nevertheless, elevated coal prices mean Imbalance Cost Pass-Through (ICPT) concerns could resurface again in six months’ time.

Given elevated coal prices, Tenaga’s under-recovery of generation costs is currently trending at more than RM3 billion a quarter. Conservatively, over RM6 billion needs to be passed-through to consumers for 2H22. We estimate this equates to a 10 sen per kWh surcharge if borne by all users or 14 sen per kWh if domestic users (households) are excluded, a sizeable increase from the current 3.7 sen per kWh surcharge. 2H22 tariff surcharge should be announced by end-June.

With the industry fund likely depleted and cost of living concerns increasingly prevalent, we believe the government would consider directly compensating Tenaga. If the pass-through does not happen, Tenaga would likely have to provide for the under-recoveries, thus swinging into losses. The resulting contagion would dampen overall market sentiment, a scenario we think the government would be keen to avoid. The risk-reward would be perceived as being more favourable if Tenaga is successful with this upcoming round of surcharge.

Hap Seng Plantations Bhd

Target price: RM4 BUY

UOB KAY HIAN RESEARCH (JUNE 8): Hap Seng Plantations’ share price has weakened 6% since May 30, after Hap Seng Consolidated lowered its stake to 69.5%. We are not concerned as it could increase liquidity.

The stock remains our top pick as it is the beneficiary of high crude palm oil (CPO) spot prices and has the highest CPO production growth among Malaysian plantation companies under our coverage. Management maintained its production guidance of 17% y-o-y growth and does not foresee any significant downside to production as its labour force is sufficient. That said, we only factor 10% y-o-y fresh fruit bunch production growth for FY22.

We expect 25% to 30% higher cost of production for FY22, mainly due to more manuring activities and the impact from higher minimum wage starting from May this year. Management guided that the impact from the prosperity tax would be RM19 million to RM20 million, assuming an average CPO price of RM5,500 per tonne for 2022.

Maintain “buy” as we expect the current high CPO prices to continue to benefit the company as it has a better pricing advantage than its Malaysian peers.

TSH Resources Bhd

Target price: RM1.90 OUTPERFORM

KENANGA INVESTMENT BANK RESEARCH (JUNE 8): Having entered into a conditional agreement to sell 13,898ha of largely undeveloped oil palm land in NE Kalimantan for RM712 million cash in April, TSH has now issued a circular for an extraordinary general meeting (EGM) on June 29. The disposal is expected to be EPS accretive. We expect minimal opposition during the EGM. Nevertheless, as TSH has to change the land status before the sale, the exercise is likely to be completed only in early FY23 with some risk of sales suffering delay or, in the worst case, falling through.

FY22 core net profit will not be impacted as we expect the agreement to conclude in 1HFY23. Nevertheless, FY23 PBT and net profit will see a y-o-y jump due to the estimated disposal gain of RM422 million.

Maintain “outperform” and target price of RM1.90 based on FY22E PER of 11 times and 1.0 times prospective FY23 net tangible asset of RM1.87 after imputing the RM422 million divestment gain. Risks to our call include adverse weather, revision to Indonesia’s biodiesel levy and export tax structure, and volatile CPO prices.