Spectrum payment to have minor impact on telco earnings, gearing

PETALING JAYA: AmInvestment Bank Bhd expects the RM118.4 million spectrum payment to have a minor impact on the earnings and gearings of Maxis Bhd, Axiata Group Bhd and Digi.Com Bhd.
The telcos each paid an upfront fee of RM118.4 million last Tuesday and agreed to an annual fixed fee of RM50 million for the 2100MHz spectrum that is currently deployed for 3G services. The annual fixed fee payment is payable by Dec 15 throughout the assignment period. The spectrum will be effective April 2 and valid for 16 years.
AmInvestment analyst Alex Goh said the additional annual costs of RM63 million, which include higher depreciation and interest charges would translate into 2% of Maxis’ 2019 earnings, 3% for Axiata and 3.5% for Digi.
“Given the lower base impact of the 2100MHz price component, we estimate that the lump sum payment will not have any significance to Maxis’ net debt/earnings before interest, taxes, depreciation and amortisation of 1.2 times, Axiata’s 1.4 times and Digi’s 0.7 times,” he added.
Meanwhile, Goh said the price component for the various bandwidths may look cheap but would be offset by the pricier annual fee.
“The pricing of the 2100MHz translates to RM3.9 million for the price component versus RM9.5 million/MHz for the 1800MHz band, RM21.8 million/MHz for the 900MHz and RM21.6 million/MHz for the 700MHz.
“Compared to the cellular coverage area of 1800Mhz which is 67% wider than 2100MHz, we view the price component as attractively priced for the telco operators."
According to AmInvestment, telcos have submitted their bids for the 700MHz frequency band, which is currently being used for analogue television broadcasting and will be available for cellular telecommunications operators on Jan 1, 2019.
This new spectrum will be used as coverage band for the deployment of high-speed mobile broadband services using long-term evolution (LTE) technology and beyond.
The MCMC will offer up to eight blocks of 2 x 5MHz bands, ranging from 703MHz-743MHz and 758MHz-798MHz, for a 15-year spectrum assignment to mobile operators.
Goh said the additional 700MHz frequency band can theoretically improve service coverage and connectivity while enabling carrier aggregation to facilitate LTE-advance penetration. However, the additional frequency band does not immediately translate into higher revenues, which will only materialise from higher paying subscriber market share as the service quality and speed improve compared with other players.
AmInvestment is maintaining a “neutral” call on the telco sector given the continued intense competition in the cellular telecommunications segment while the fixed broadband segment could face rising pressure from the government to cut tariffs to drive a knowledge and IT-driven economy.
Its top “buys” remain Axiata and Telekom Malaysia Bhd due to the game-changing merger prospects which will significantly enhance their earnings and market share trajectory.
Meanwhile, the research house maintained "hold" calls on Maxis and Digi due to the resistance in gaining traction in revenue growth amid potential loss in competitive advantage under a re-energised Axiata-TM brand.