Analysts say 700Mhz spectrum pricing structure is ‘pro-business’

PETALING JAYA: Analysts contend that the pricing structure for the reallocation exercise by the Malaysian Communication and Multimedia Commission (MCMC) for 700Mhz spectrum blocks is “pro-business”, and therefore a positive development for the sector.

HLIB Research said the costs are lower than expected vis-à-vis per 900MHz block for RM218.3 million charge and RM18.8 million annual fee.

“No update on the sub-2GHz bands (2.1/2.3/2.6GHz) expiring 2017-18 but this solidifies our earlier belief that pricing will be benchmarked against 1800MHz’s RM95.1 million per block,” the firm said in its report.

AmInvestment Bank’s note called the pricing structure “favourable” for the telco sector given that the 700MHz band has over 40% wider coverage footprint compared with the 900MHz band.

“However, we believe that the pricing exercise for the upcoming band should have the similar minimal earnings per share (EPS) and balance sheet impact expected from the earlier 1800MHz spectrum assignment, which cost only 44% of the price component and annual fee of the 700MHz band,” AmInvestment said. The firm expects minimal impact on the balance sheets of telcos, except for Digi.com Bhd.

“Based on a 2x5MHz allocation for the lump sum payment, the FY18F net debt/ebitda (earnings before interest tax depreciation and amortisation) and impact is minimal, remaining at 1.5x for Axiata, 1.2x for Maxis and 1.8x for TM. However, given Digi’s low debt levels, its FY18F net debt/ebitda will rise from 0.6x to 0.7x, which is still comfortably within the group’s acceptable gearing,” it explained.

Applications for the 700MHz frequency bands, which are currently used for analogue broadcasting services, open on Oct 31 and close on Jan 2, 2018.

The validity period of the spectrum assignment will be 15 years from the effective date of the spectrum assignment and each applicant can indicate interest for up to four blocks. Successful applicants who choose to pay a lump sum will be charged RM215.54 million for a 2x5MHz spectrum block. Instalment payments are at least RM45 million higher.

For instance, the price for a spectrum block will be RM260.60 million for five equal annual payments, RM328.38 million for 10 equal annual payments and RM417.12 million for 15 equal annual payments. The annual fee for each 2x5MHz spectrum block is set at RM18.54 million.

AmInvestment stated that the additional frequency band will not immediately translate into higher revenues, which will only materialise from higher paying subscriber market share on the back of improved service quality and speed, compared with other players.

AmInvestment maintained a neutral call on the sector, given the continued intense competition in the telco segment, with hold recommendations on Maxis and Digi and buys on Axiata and TM, due to a game-changing re-merger likelihood.

HLIB maintained its neutral call on the sector due to the lack of positive catalysts in the near term, although the firm maintained that telcos remain stable supported by resilient domestic demand.

“Their dependable dividend yield will be a plus point in a volatile market,” it added.
On MCMC exploring the idea of reload with identification mechanism, HLIB said while the move would enhance reload safety, it will undeniably pose challenges to telcos in terms additional cost and may curb spending due to the inconvenience.

HLIB’s top pick is TIMEdotcom, which is seeing retail gain momentum on the back of reach expansion and undisputable high-value products; data centre’s steady expansion and strong growth trajectory underpinning its Asean ambition. It has a hold call on the stock with a target price of RM9.98.