Telco. In a tight spot. Underweight (maintain) Sector Update

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1 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 6 December 2016 In a tight spot Although funding issues for future spectrum re-farming exercises are not expected, any increase in competition intensity or a larger-thanexpected payment could thwart FCFs and may put dividends at risk. With the government s commitment on reducing its fiscal deficit and new competition trying to carve out market share, the risk is real. Meanwhile, sector dividend yields are already unappealing while the increased risk does not support the sector s premium valuations. Maintain sector Underweight rating with DiGi for preferred exposure. Sector Update Telco Underweight (maintain) Cellcos can juggle spectrum cost and dividends, but risk is there The government managed to raise upfront fees of RM2.7bn from the recent round of spectrum reallocation (for the 900Mhz and 1800Mhz bands), or the first of three lined up till While there is sufficient capacity for the cellcos to juggle spectrum cost and dividend commitment, we think that dividend upside will be capped, while downside risk is enhanced. Should the cost of future spectrum be higher than anticipated or competition accelerates, the threat of lower dividends would be real. Competition more rational, for now On a more positive note, irrational competition which has eroded revenue and profitability of the 3 incumbent cellcos over , has somewhat dissipated in recent months. We would nevertheless not discount further price competition from the fourth player, U Mobile, which has gained traction; with better spectrum allocation, it will be an even more formidable player. Webe, which was recently launched, remains a niche player, but can be a potential threat with its strong parentage and their ambitions. 3Q16 results season broadly in line 9M16 core earnings for the telcos fell a sharp 27% yoy but were broadly in line with expectations, with the exception of Axiata. Sequentially, earnings picked up, although largely due to the 2Q16 low base. On the whole, earnings for the telcos were generally impacted by more intense price competition and start-up losses. We had downgraded Axiata to a Sell due to continued earnings disappointment and the lack of a re-rating catalyst. Maintain UNDERWEIGHT Although stock prices have corrected and the sector has underperformed the broader FBMKLCI, sector valuations remain lofty. We think that this could be attributed to a combination of reasons including the sector weighting and its liquidity. The sector s Shariah compliance status also helps in its positioning, especially amongst domestic funds. Nevertheless, against a backdrop of unattractive valuations and yields that have turned less compelling (because of the earnings contraction), and the lack of a rerating catalyst, we remain sector Underweight with DiGi (DIGI MK) as our sector top pick given its ability to sustain dividend payouts, growing revenue market share and most appealing yields. Peer Comparison Rating Sh Pr TP Mkt Cap Year Core PE (x) EPS growth (%) EV/EBITDA P/B ROE (%) Div. Yield (%) (RM) (RM) (RMm) end CY16E CY17E CY16E CY17E (x) (x) CY16E CY17E CY16E CY17E Axiata SELL ,736 Dec Maxis * HOLD ,035 Dec DiGi * HOLD ,564 Dec TM SELL ,074 Dec Source: Bloomberg, Affin Hwang forecasts. Note: Pricing as of close on 5 December Note: our 12- month target prices are based on a DCF valuation. *TP change Absolute Performance (%) 1M 3M 12M Axiata -10.8% -22.6% -27.6% Maxis +3.4% -3.2% -6.7% DiGi -0.5% -0.1% +2.2% TM -5.4% -9.1% -3.9% Relative Performance to KLCI (%) % DiGi Telekom Axiata Maxis Source: Affin Hwang, Bloomberg Kevin Low (603) kevin.low@affinhwang.com Page 1 of 22

2 Re-visiting the spectrum angle Spectrum reallocation rakes in a total of RM6.3bn On 30 th August 2016, the government announced the revised allocation of spectrum for the 900Mhz and 1800Mhz bands. Payment for this spectrum was made on 1 November 2016 while the re-farming of the spectrum will be fully implemented on 1 January 2017 (1800MHz) and 1 July 2017 (900MHz) respectively. What came as a surprise was the announcement that the cellcos would fork out the full payment without considering the option to stagger the cost. Funding for the price component of the spectrum cost, amounting to a combined RM2.2bn for the listed 3 cellcos (RM2.7bn inclusive of unlisted U Mobile), would be made via internally generated funds and borrowings. Separately, the cellcos would need to pay an annual fee amounting to a combined RM238m pa over the next 15 years for the usage of the spectrum. Thus, we arrive at a total value of RM6.3bn for the 900MHz and 1800MHz spectrum. Fig 1: Spectrum allocation and fees payable Price Component (RMm) Annual Fee (RMm) Spectrum (MHz) Maxis 2 x 10 2 x Celcom 2 x 10 2 x DiGi 2 x 5 2 x U Mobile 2 x 5 2 x Source: MCMC, Affin Hwang, Starbiz 2 further re-farming exercises to follow We take comfort that the cellcos are able to fund the initial outlay and the recurring annual fees. Nevertheless, questions should once again arise over funding for the future two spectrum re-farming exercises. The regulator has guided that it would review the 700MHz, 2300MHz and 2600MHz bands, by end 2016 (although we now understand that this may not happen before year-end). Meanwhile, the 2100MHz band would also expire in April Spectrum will not come cheap While we are uncertain how the upcoming spectrums will be priced, we are of the view that the upcoming fees will not come cheap, given the value proposition of the spectrum. Of particular interest will be the prized 700MHz band, which could aid a quicker and more cost effective rollout of services. Thus, in our view, the future spectrum cost would possibly match the cost of the recent re-farming exercise, at the very least. Government still needs to narrow its fiscal deficit Moreover, our view that future spectrum payments will remain high is reinforced by the government s need to meet its financial targets and commitment of balancing its fiscal deficit position (Fig 2). Affin estimates that the government s fiscal deficit position will narrow to 1.5% by 2020 from 3.2% in This, we believe, may have also partially influenced the decision of the cellcos to make a one-off payment rather than stagger the cost. Page 2 of 22

3 F 2017F 2018F 2019F 2020F 6 December 2016 Fig 2: Government is committed to narrow its fiscal position % of GDP Source: Affin Hwang estimates, MOF Further dilution of spectrum unlikely Incumbents face additional risk of spectrum loss Cost aside, an additional risk following the spectrum re-farming exercise is that the larger incumbent cellcos may further lose spectrum to the smaller players. In the recent round, the larger cellcos have had to make some sacrifices in terms of bandwidth for the smaller players like U Mobile (Fig 3). Fig 3: Spectrum re-farming for the 900/1800MHz bands Previous spectrum allocation 900 MHz Celcom Maxis DiGi 2 x 17MHz 2 x 16MHz 2 x 2MHz 1800MHz Celcom Maxis DiGi 2 x 25MHz 2 x 25MHz 2 x 25MHz Current spectrum allocation Celcom Maxis DiGi U Mobile 900MHz 2x10MHz 2x10MHz 2x5 MHz 2x5 MHz 1800MHz 2x20MHz 2x20MHz 2x20 MHz 2x15 MHz Source: MCMC But significant loss of bandwidth is unlikely While this may be a potential risk, we are of the view that the government will need to re-balance the future allocation in such a way that it is able to meet its own financial criteria, ie, ensuring that the government can achieve its revenue collection targets and thus giving the larger and more profitable incumbents an upper hand. The smaller cellcos on the other hand may not have the same financial capacity and balance sheet as the incumbents. Page 3 of 22

4 Smaller telcos also likely to remain Conversely, any major loss of spectrum by the smaller players may also be unlikely given the political connections and strong ultimate shareholders of these smaller companies. Thus, the current collaboration between the smaller players and the larger cellcos to fully utilise and optimise the spectrum may continue. Higher cost for those with spectrum dilution On a related note, the loss of the more valuable lower bandwidth will have its own financial implications on the cellcos capex plans and network infrastructure. While the cellcos have not provided any capex guidance, with the changes in bandwidth capacity, we think that the impact could be mildly positive for DiGi, but possibly negative for Celcom and Maxis which could also result in some margin erosion in the quarters ahead. Spectrum fees - the cost and impact Impact on FCFs - How significant is RM2.2bn to the sector? We take a look at the cost of the spectrum and the impact on the telcos FCFs and their dividend paying capability below. The cumulative FCFs for the 3 players in 2016E are estimated at RM4.5bn. After the payment of dividends (assuming that Celcom pays out the majority of its FCF as dividends), FCF ex dividends falls to RM0.3bn, against the spectrum cost of RM2.2bn. Fig 4: Sector FCFs ex div do not appear to support upcoming spectrum cost RMm FCF FCF ex Div Spectrum cost 6,000 5,000 4,000 3,000 2,000 1,000 - (1,000) Source: Companies, Affin Hwang forecasts E 2017E 2018E Sector FCFs ex dividend appear stretched, but On the surface, sector FCFs ex dividend do not seem to be able to support the spectrum payment and concurrent dividends without the latter giving way. This is also consistent with the upcoming spectrum re-farming exercises, where we assume the 2017 spectrum upfront cost to be similar to that of Likewise for 2018, even with lower spectrum fees (considering it is only for a single band), there will be a shortfall in FCF ex dividends. Page 4 of 22

5 Fig 5: Maxis has highest FCF ex dividends (RMm) 1,000 DiGi Maxis Celcom (200) E 2017E 2018E (400) (600) (800) Source: Companies, Affin Hwang forecasts Celcom and DiGi can lever up to fund dividend outflow Nevertheless, drilling down to the companies tells a different story. While DiGi s and Celcom s FCFs ex dividends appear low and Maxis has the strongest FCF (and in the best position to support future spectrum payments via FCFs), we believe that both DiGi and Celcom will have the ability to leverage up (Fig 6), to ensure that their financial liabilities are met. Fig 6: Net Debt/EBITDA (x) 2.5 DiGi Maxis Celcom Sector Average E 2017E 2018E Source: Companies, Affin Hwang forecasts Maxis faces greatest risk of a near-term dividend miss On this note, it would appear that Maxis upcoming final dividend payment for 2016E (historically announced in tandem with the 4Q16 results) may potentially be at risk when we consider the FCF ex dividends of RM423m (assuming a DPS of 20 sen) against the spectrum cost of RM817m. Nevertheless, we are of the view that Maxis will likely stretch its balance sheet to ensure a payment in 4Q16; otherwise, there could be severe financial repercussions. Page 5 of 22

6 Where is the risk from here? Any spectrum fee in excess of 2016 cost could be an issue Our analysis suggests that the respective cellcos will be able to support their dividend commitments going into 2017E and 2018E, and meet spectrum cost payments. This is based, however, on the primary assumption that each of the future re-farming exercises will have costs similar to the fee made in In our view, Maxis would be a key casualty should any future spectrum cost exceed the 2016 level. Nevertheless, we think that by then there would be a higher chance that the players would be able to pay the spectrum fee in tranches. More intense competition will be a key risk More important is the requirement that the competitive environment remains relatively rational as our FCF forecasts will not hold otherwise. On the whole, we have assumed that margins for the cellcos will remain stable with continued topline growth. Any deviation from the above will be a further drag on FCFs and thus dividends. We take a look at the competitive environment in the section below. Fig 7: EBITDA margins 60% Celcom DiGi Maxis 50% 40% 30% 20% 10% 0% E 2017E 2018E Source: Companies, Affin Hwang forecasts Page 6 of 22

7 Competition has abated, for now Intense price competition over the past 2 years Competition amongst the cellcos had been intense over the past 2 years, both in the prepaid and postpaid segments. In the former, players tried to pursue market share in the lucrative migrant segment while in the latter, the cellcos turned aggressive in their data bundling plans, raising data download quotas and offering lower prices. Competition has negatively impacted revenue and profitability Competition was however largely sparked off by aggressive marketing by unlisted fourth player, U Mobile. Although financial information from U Mobile is scarce, the data collected from the 3 incumbent players highlight a shrinking market pie (at least amongst the incumbents). In 2015, revenue and EBITDA for the sector contracted for the second consecutive year. Based on current trends and ytd performance, it appears that the incumbents are set to experience their third consecutive year of declines in 2016E. Fig 8: Shrinking revenue and profits RMm 23,500 Sector revenue Sector EBITDA (RHS) RMm 11,500 23,000 22,500 11,000 22,000 21,500 10,500 21,000 10,000 20,500 20,000 9,500 19,500 19, Source: Affin Hwang, Companies 9,000 ARPUs lower and offerings improved In short, while consumption has increased (reflected by the increase in average data usage [Fig 9] and the continued increase in generous data quotas being offered), ARPUs have deteriorated over the past 2 years (Fig 10), with the exception of Maxis which has been cleaning up its subscriber base. Page 7 of 22

8 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 6 December 2016 Fig 9: Average data consumption (Maxis) GB/month Q14 3Q Source: Maxis, Affin Hwang Postpaid Prepaid Fig 10: Sector ARPUs (prepaid and postpaid) RM Postpaid (LHS) Prepaid (RHS) RM Source: Celcom, DiGi, Maxis, Affin Hwang More rational competition in recent months On a more positive note, the irrational competition has somewhat dissipated in recent months. This may however be attributed to the recent spectrum re-farming exercise resulting in the additional financial burden and potentially the need to re-strategize marketing plans. The weak consumer sentiment on the ground and the lack of catalysts to drive ARPUs could also be reasons for the cellcos to shelve any aggressive marketing plan. Page 8 of 22

9 Little reaction to Celcom s recent initiative The recent initiative by Celcom to double its postpaid data quota did not trigger much reaction from its competitors. We think that this is likely because the marketing move was to play catch-up rather than to make an impact. As can be seen in Fig 11, package plans are nearly comparable although the entry-level postpaid plans offered by DiGi and U mobile are still the most attractive. Fig 11: Celcom s data plans are now on par with peers Postpaid Webe DiGi U mobile Celcom Maxis Price Plans (RM) 28 Data Quota (GB) U (Video-Onz) Postpaid Postpaid 50 P50 First Blue Price Plans (RM) Data Quota (GB) 5 + 5* 5 + 5(Video-Onz) 2 + 2* Postpaid Webe Postpaid 80 P70 FIRST Gold MOP 98 Price Plans (RM) 79** Data Quota (GB) Unlimited * (Video-Onz) * * Postpaid Postpaid 110 P98 FIRST Gold Plus MOP 128 Price Plans (RM) Data Quota (GB) * 30 + Unlimited Video-Onz * * Postpaid First Platinum MOP 158 Price Plans (RM) Data Quota (GB) * * Postpaid MOP 188 Price Plans (RM) 188 Data Quota (GB) * * Free weekend internet ** Promotional offer, discount RM120, from original price of RM199 Source: Celcom, DiGi, Maxis, Affin Hwang Fig 12: Prepaid plans DiGi U mobile Celcom Maxis Prepaid DiGi Prepaid Live U Mobile POWER Xpax Turbo Hotlink FAST Starter Pack (RM) Free monthly data 8GB Streaming (1GB Video + 1 GB Music weekly) 1GB (no restriction) 10GB (from 1am- 7am) 8GB (2GB every weekend) Source: Celcom, DiGi, Maxis, Affin Hwang but Yes and Webe may turn aggressive On the other hand, competition from YTL s Yes and TM s Webe remains rather mild, although to be fair, the latter has only recently rolled out its services. Nevertheless, we would not rule out the prospects of increased competition ahead. U Mobile may remain an aggressor although its spectrum fee may now pose a serious consideration in terms of its future Page 9 of 22

10 marketing strategy. However, with increased spectrum, U Mobile is a formidable player today. TM s strong balance sheet and convergence ambitions also make Webe a real threat. But DiGi still gaining ground amongst incumbents DiGi seems to be gaining ground amongst incumbents On a separate note, while the cumulative revenue and profit for the incumbent 3 players have been shrinking, it appears that DiGi has been gaining traction in terms of revenue market share, among the 3 players, (Fig 13) over a longer time frame. Shorter-term, Maxis seems to have managed to prevent a rout in its business and showed growth in revenue and earnings in 2015 (Fig 14). We think this could partly be due to its marketing strategies while also having a premium network with superior coverage and quality. Fig 13: DiGi has been grown revenue market share longer term 45% 40% Maxis Celcom Digi 35% 30% 25% 20% Source: Celcom, DiGi, Maxis, Affin Hwang Fig 14: Maxis profitability improved in 2015 RMm 5,000 Celcom DiGi Maxis 4,500 4,000 3,500 3,000 2,500 2,000 1, Source: Celcom, DiGi, Maxis, Affin Hwang Page 10 of 22

11 Fixed-line player also plagued with issues TM facing its fair share of problems Fixed line player TM is not without its own set of problems. Although it does not face any near-term regulatory (spectrum) risk, the decline in fixed-line operations have yet to plateau while growth from its internet division is slowing. Recent Budget 2017 measures are negative on TM We also believe that the recent 2017 Budget measures are negative on TM and will likely impact the group s revenue and profitability. The measures include the following: 1) Effective Jan 2017, fixed-line broadband service providers have to offer services at a higher speed for the same price; 2) Within the next two years, the speed will be doubled with a reduction in price by 50%. Convergence ambitions led to Webe Furthermore, its convergence ambitions which led to the rollout of its wireless service Webe, would see this unit taking a toll on earnings over the near term. In our view, despite TM having a ready customer base and the scope to upsell its wireless service (Webe), we find that the cellcos are already offering competitive and equally compelling propositions. Even upcoming U Mobile has found it difficult to sustain a turnaround. From our understanding, its listing plans have been deferred once and it is now targeting a 2017 IPO.,,,which may likely be a drag over the near-mid term Because of the investment outlay, market saturation and stiff competition, we are of the view that Webe may take beyond the next 3 years to break even. Meanwhile EBIT losses which amounted to RM289m in FY15, and are estimated to have widened in 9M16 (1H16 EBIT losses of RM290m), will remain a near-term drag. On a brighter note, downside on dividends should be capped by TM s policy which specifies a minimum payout of RM700m or 90% of normalised PATAMI; that said, dividend yields at c.3% are not compelling. Fig 15: Widening EBIT losses from Webe RM m Revenue 100 EBIT Loss Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q Source: Affin Hwang, TM Page 11 of 22

12 3Q results review 9M16 sector earnings declined 27% yoy 9M16 sector core earnings fell 27% yoy to RM4.3bn dragged down primarily by Axiata, which saw earnings contract 57% over the same period. Nevertheless, telcos reported weaker 9M16 earnings across the board, primarily due to stiffer competition (for the cellos) and start-up losses (TM s Webe). Fig 16: 9M16 sector core earnings down 27% yoy, dragged down by Axiata RMm 7,000 6,000 5,000 4,000 3,000 2,000 1,000 9M15 9M16 - Axiata DIGI Maxis TM Sector Source: Celcom, DiGi, Maxis, TM, Affin Hwang Fig 17: 3Q16 sector earnings up 9% qoq RMm 2,500 3QCY15 2QCY16 3QCY16 2,000 1,500 1, Axiata DIGI Maxis TM Sector Source: Celcom, DiGi, Maxis, TM, Affin Hwang Except for Axiata, telcos registered sequential earnings growth Earnings momentum was positive in 3Q16 as the sector managed to eke out a growth of 8.7% qoq. Except for Axiata, the telcos registered stronger earnings in 3Q16. This was underpinned by a combination of: 1) a low base effect in 2Q16, and 2) margin improvement as most telcos controlled their costs (Fig 18). Also, because of Maxis revenue growth of 2.6% qoq in 3Q16, it increased its revenue market share by 115ppts qoq. Correspondingly, both DiGi and Celcom lost revenue share (Fig 19). Page 12 of 22

13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 6 December 2016 Fig 18: Quarterly EBITDA margin relatively stable (except for Celcom) % 60 Celcom Digi Maxis TM Source: Celcom, DiGi, Maxis, TM, Affin Hwang 9M16 results broadly in line except for Axiata On the whole, although 9M16 results were weaker yoy, this was broadly within expectations with the exception of Axiata which continued to report disappointing earnings that are below both our and consensus expectations. Axiata s 9M16 results only made up 55-59% of the estimates and the negative surprise on our part was due to higher-than-expected depreciation charges and weaker contribution from its associates. We had cut Axiata s E EPS by 14-22% and also downgraded the stock to Sell (from Hold) (see Axiata: Another disappointing quarter, 25 November 2016) as near-term re-rating catalysts for the stock remain limited. Fig 19: Quarterly revenue market share 100% Celcom DiGi Maxis 90% 80% 35% 35% 35% 35% 35% 36% 37% 37% 38% 37% 38% 70% 60% 50% 31% 31% 31% 31% 31% 31% 30% 31% 31% 31% 31% 40% 30% 20% 34% 34% 34% 34% 33% 33% 33% 32% 31% 32% 31% 10% 0% Source: Celcom, DiGi, Maxis, TM, Affin Hwang Page 13 of 22

14 Earnings Outlook Slight changes to DiGi and Maxis EPS forecast We make some slight changes to our EPS forecasts for DiGi and Maxis (MAXIS MK) after tweaking our model for the recent spectrum payment in terms of higher interest payments. For DiGi and Maxis, we trim our E EPS by 0.5%/0.8%/0.5% and 0.5%/0.9%/0.9%, respectively. Correspondingly, we fine-tune down our DCF-based 12-month target prices for DiGi to RM5.01 (from RM5.09) and for Maxis to RM6.00 (from RM6.08). We make no changes to our EPS forecasts or 12-month TPs for TM (T MK) and Axiata (AXIATA MK). Fig 20: Sector net profit to decline 12% in 2016E before recovering in 2017E RMm Sector Net profit Growth 8,000 10% 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2017E 2018E Source: Companies, Affin Hwang forecasts 5% 0% -5% -10% -15% Sector earnings likely to rebound in 2017E On the whole, we project sector earnings to decline by 12% for 2016E before recovering by 7% for 2017E (Fig 20). The rebound is primarily underpinned by a turnaround in Axiata s operations and thus group profitability, which is expected to jump 27% yoy. There is thus some downside risk to sector earnings should Axiata s opcos fail to turn around as expected. Excluding Axiata, we are projecting the sector to register 2017E earnings growth of only 0.8%, reflective of a fairly mature and competitive operating environment. Page 14 of 22

15 Valuations and recommendation Sector still trading at valuation premium Although stock prices have corrected ytd and the sector has underperformed the broader FBM KLCI, sector valuations remain lofty at an average 2017E PE of 23x. We think that this could be attributed to a combination of reasons including the sector weighting in the FBM KLCI and its liquidity. The sector s Shariah compliance status also helps in its positioning, especially amongst domestic funds. Hence, despite unattractive valuations and yields that have turned less compelling (because of the earnings contraction), the sector remains a crowded trade for the above reasons. Fig 21: Sector net profit to decline 12% in 2016E before recovering in 2017E PE (%) Sector PE Sector DY (RHS) DY (%) Source: Bloomberg, Affin Hwang which in our view is not justified On the whole, the PER multiples are generally not far from their peaks (respective companies PER bands in Fig 23-26) while dividends yields are significantly lower (Fig 21), having more than halved since their peak in 2012 and near their 5-year lows. This, in our view, does not justify the premium valuations. Moreover, with the potential risk of lower dividends ahead, the valuation premium is even less justifiable. Maintain Underweight Against a backdrop of unattractive valuations and yields with a lack of immediate re-rating catalysts, we remain sector Underweight. Furthermore, with a rising US interest rate environment (and potentially a rise in Malaysian Government Securities yields), we believe that there is further scope for sector underperformance (Fig 22). For sector exposure, DiGi is our sector top pick given its ability to sustain dividend payouts, growing revenue market share and most appealing yields. Page 15 of 22

16 1/1/2010 1/7/2010 1/1/2011 1/7/2011 1/1/2012 1/7/2012 1/1/2013 1/7/2013 1/1/2014 1/7/2014 1/1/2015 1/7/2015 1/1/2016 1/7/ December 2016 Fig 22: 10-year MGS yields vs KL Telco price performance Yield (%) MGS yield KL Telecom 5.0 Index Source: Bloomberg, Affin Hwang Fig 23: DiGi: Forward PE band Fig 24: Maxis: Forward PE band (x) 29 PE Avg PE +1SD -1SD 30 (x) PE Avg PE +1SD -1SD Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Source: Company, Affin Hwang forecasts 5 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 Source: Company, Affin Hwang forecasts Fig 25: TM: Forward PE band (x) 35 PE Avg PE +1 SD -1 SD Fig 26: Axiata: Forward PE band (x) PE Avg PE +1SD -1SD Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Source: Company, Affin Hwang forecasts 0 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Source: Company, Affin Hwang forecasts Page 16 of 22

17 Sector risks The key risk to our underweight call is that the telcos are a large cap, liquid and Shariah compliant sector, which continues to benefit from strong fund flows despite the earnings disappointment and contraction in dividend yields. However, for a high yielding dividend play, we are of the view that a better alternative can be found in the M-REITs. From a regulatory perspective, there could be positive surprises should the cost of the upcoming spectrums be lower than expected. Page 17 of 22

18 Axiata FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE Dec (RMm) E 2017E 2018E FYE Dec (RMm) E 2017E 2018E Revenue 18,712 19,883 21,514 22,793 23,331 Growth Operating expenses (11,619) (12,599) (13,502) (14,157) (14,474) Revenue (%) EBITDA 7,093 7,284 8,012 8,637 8,857 EBITDA (%) (3.1) Depreciation (3,639) (4,170) (5,157) (5,172) (5,206) Core net profit (%) (16.6) (7.9) (31.6) EBIT 3,453 3,114 2,855 3,465 3,651 Net interest income/(expense) (548) (658) (947) (876) (799) Profitability Associates' contribution EBITDA margin (%) Exceptional Items (97) (295) (262) - - PBT margin (%) Pretax profit 3,147 3,331 1,791 2,719 3,035 Net profit margin (%) Tax (778) (695) (484) (707) (789) Effective tax rate (%) (24.7) (20.9) (27.0) (26.0) (26.0) Minority interest (4) (82) (153) (208) (293) ROA (%) Net profit 2,365 2,554 1,155 1,804 1,952 Core ROE (%) ROCE (%) Balance Sheet Statement Dividend payout ratio (%) FYE Dec (RMm) E 2017E 2018E Fixed assets 19,933 23,134 21,976 20,805 19,599 Liquidity Other long term assets 20,878 23,128 23,274 23,404 23,587 Current ratio (x) Total non-current assets 40,811 46,261 45,250 44,208 43,186 Op. cash flow (RMm) 5,584 6,291 7,451 8,270 8,210 Cash and equivalents 5,116 5,511 6,890 8,641 10,290 Free cashflow (RMm) 1,836 1,430 3,451 4,270 4,210 Stocks FCF/share (sen) Debtors 3,062 3,955 3,831 4,059 4,155 Other current assets Asset managenment Total current assets 8,316 9,857 11,134 13,124 14,873 Debtors turnover (days) Creditors 8,375 9,643 9,725 10,304 10,547 Stock turnover (days) Short term borrowings 1,949 2,348 2,348 2,348 2,348 Creditors turnover (days) Other current liabilities Total current liabilities 10,559 12,490 12,572 13,151 13,394 Capital structure Long term borrowings 11,945 14,045 13,845 13,645 13,445 Net gearing (%) Other long term liabilities 5,879 6,059 6,211 6,420 6,713 Interest cover (x) (9.5) (8.8) (7.0) (7.7) (8.0) Total long term liabilities 17,824 20,103 20,056 20,065 20,158 Shareholders' Funds 20,745 23,525 23,756 24,117 24,507 Quarterly Profit & Loss FYE 31 Dec (RMm) 3Q15 4Q15 1Q16 2Q16 3Q16 Cash Flow Statement Revenue 5,065 5,360 5,009 5,310 5,457 FYE Dec (RMm) E 2017E 2018E Operating expenses (2,745) (3,294) (3,153) (3,068) (3,374) EBIT 3,453 3,114 2,855 3,465 3,651 EBITDA 2,320 2,066 1,856 2,242 2,083 Depreciation & amortisation 3,639 4,170 5,157 5,172 5,206 Depreciation (1,032) (1,183) (1,165) (1,391) (1,303) Working capital changes 1, EBIT 1, Cash tax paid (778) (695) (484) (707) (789) Net int income/(expense) (175) (242) (204) (282) (244) Others (2,597) (599) (262) - - Associates' contribution (4) Cashflow from operations 5,584 6,291 7,451 8,270 8,210 Exceptional Items (198) 139 (2) (179) (81) Capex (3,748) (4,861) (4,000) (4,000) (4,000) Pretax profit 1, Disposal/(purchases) Tax (72) (314) (151) (177) (156) Others (2,599) (1,479) Minority interest (64) (48) (33) (43) (39) Cash flow from investing (6,347) (6,340) (4,000) (4,000) (4,000) Net profit Debt raised/(repaid) 481 (1,943) (200) (200) (200) Core net profit 1, Equity raised/(repaid) Net int inc/(expense) (548) (658) (947) (876) (799) Margins (%) Dividends paid (1,885) (722) (924) (1,443) (1,562) EBITDA Others 1,515 2, PBT Cash flow from financing (397) (476) (2,071) (2,519) (2,561) Net profit Free Cash Flow 1,836 1,430 3,451 4,270 4,210 Source: Company, Affin Hwang forecasts Page 18 of 22

19 DiGi FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE Dec (RMm) E 2017E 2018E FYE Dec (RMm) E 2017E 2018E Total revenue 7,019 6,914 6,607 6,813 6,961 Growth Operating expenses (3,855) (3,932) (3,674) (3,789) (3,885) Revenue (%) 4.2 (1.5) (4.4) EBITDA 3,163 2,982 2,933 3,024 3,075 EBITDA (%) 4.0 (5.7) (1.6) Depreciation (427) (562) (541) (555) (585) Core net profit (%) 19.1 (15.2) (2.0) Amortisation (65) (65) (65) (105) (62) EBIT 2,671 2,354 2,327 2,364 2,428 Profitability Net interest income/(expense) (26) (46) (75) (94) (98) EBITDA margin (%) Associates' contribution PBT margin (%) Others Net profit margin (%) Pretax profit 2,645 2,309 2,252 2,270 2,330 Effective tax rate (%) Tax (614) (586) (564) (569) (573) ROA (%) Minority interest Core ROE (%) Net profit 2,031 1,723 1,688 1,701 1,758 ROCE (%) Dividend payout ratio (%) Balance Sheet Statement FYE Dec (RMm) E 2017E 2018E Liquidity Fixed assets 2,382 2,643 3,520 3,785 4,020 Current ratio (x) Other long term assets Op. cash flow (RMm) 2,699 2,225 2,305 2,498 2,534 Total non-current assets 2,884 3,160 3,971 4,131 4,304 Free cashflow (RMm) 1,800 1, ,678 1,714 Cash and equivalents (142) (258) (401) FCF/share (sen) Stocks Debtors Asset management Other current assets Debtors turnover (days) Total current assets 1,424 1,502 1, Stock turnover (days) Creditors 1,844 2,056 1,965 2,026 2,070 Creditors turnover (days) Short term borrowings 804 1,269 1,769 1,769 1,769 Other current liabilities Capital structure Total current liabilities 3,087 3,757 4,147 4,221 4,274 Net Gearing (%) Long term borrowings Interest Cover (x) Other long term liabilities Total long term liabilities Quarterly Profit & Loss Shareholders' Funds FYE 31 Dec (RMm) 3Q15 4Q15 1Q16 2Q16 3Q16 Revenue 1,675 1,725 1,653 1,655 1,619 Cash Flow Statement Operating expenses (956) (1,024) (949) (920) (844) FYE Dec (RMm) E 2017E 2018E EBITDA EBIT 2,671 2,354 2,327 2,364 2,428 Depreciation (170) (169) (156) (144) (174) Depreciation & amortisation EBIT Working capital changes (39) (128) (64) Net int income/(expense) (12) (13) (15) (16) (16) Cash tax paid (501) (601) (564) (569) (573) Associates' contribution Others 76 (28) Exceptional Items Cashflow from operations 2,699 2,225 2,305 2,498 2,534 Pretax profit Capex (900) (897) (1,418) (820) (820) Tax (140) (137) (135) (155) (147) Disposal/(purchases) Minority interest Others Net profit Cash flow from investing (880) (886) (1,418) (820) (820) Core net profit Debt raised/(repaid) Equity raised/(repaid) Margins (%) Net inct income/(expense) (25.8) (45.7) (74.5) (94.2) (97.9) EBITDA Dividends paid (2,006) (1,889) (1,688) (1,701) (1,758) PBT Others Net profit Cash flow from financing (1,711) (1,643) (1,262) (1,795) (1,856) Free Cash Flow 1,820 1, ,678 1,714 Source: Company, Affin Hwang forecasts Page 19 of 22

20 MAXIS FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE Dec (RMm) E 2017E 2018E FYE Dec (RMm) E 2017E 2018E Total revenue 8,389 8,601 8,661 8,843 8,878 Growth Operating expenses (4,093) (4,216) (4,168) (4,229) (4,290) Revenue (%) (7.7) EBITDA 4,296 4,385 4,494 4,615 4,589 EBITDA (%) (6.1) (0.6) Depreciation (1,155) (1,154) (1,119) (1,183) (1,229) Core net profit (%) (7.3) (0.5) (2.2) Amortisation (249) (278) (278) (332) (332) EBIT 2,892 2,953 3,097 3,099 3,027 Profitability Net interest income/(expense) (380) (412) (407) (403) (389) EBITDA margin (%) Associates' contribution PBT margin (%) Others Net profit margin (%) Pretax profit 2,512 2,541 2,689 2,696 2,638 Effective tax rate (%) Tax (711) (713) (699) (715) (700) ROA (%) Minority interest (8) (4) (4) (4) (4) Core ROE (%) Net profit 1,793 1,824 1,986 1,977 1,934 ROCE (%) Dividend payout ratio (%) Balance Sheet Statement FYE Dec (RMm) E 2017E 2018E Liquidity Fixed assets 4,008 4,227 5,275 5,292 5,263 Current ratio (x) Other long term assets 11,523 11,890 11,612 11,279 10,947 Op. cash flow (RMm) 4,107 4,073 3,767 4,036 4,053 Total non-current assets 15,531 16,117 16,887 16,571 16,210 Free cashflow (RMm) 3,129 2,562 2,417 2,836 2,853 Cash and equivalents 1,531 1,296 1,652 2,472 3,310 FCF/share (sen) Stocks Debtors 971 1, Asset management Other current assets Debtors turnover (days) Total current assets 2,578 2,818 2,620 3,459 4,301 Stock turnover (days) Creditors 3,002 3,467 2,969 3,012 3,056 Creditors turnover (days) Short term borrowings 949 1,117 1,117 1,117 1,117 Other current liabilities Capital structure Total current liabilities 4,183 4,894 4,396 4,439 4,483 Net Gearing (%) Long term borrowings 8,118 8,801 9,301 9,301 9,301 Interest Cover (x) Other long term liabilities 1,070 1,070 1,070 1,070 1,070 Total long term liabilities 9,188 9,871 10,371 10,371 10,371 Quarterly Profit & Loss Shareholders' Funds 4,738 4,221 4,741 5,220 5,657 FYE 31 Dec (RMm) 3Q15 4Q15 1Q16 2Q16 3Q16 Revenue 2,166 2,176 2,140 2,102 2,156 Cash Flow Statement Operating expenses (1,136) (1,033) (964) (1,052) (999) FYE Dec (RMm) E 2017E 2018E EBITDA 1,030 1,143 1,176 1,050 1,157 Net Profit 1,793 1,824 1,986 1,977 1,934 Depreciation (336) (378) (355) (344) (348) Depreciation & amortisation 1,155 1,154 1,119 1,183 1,229 EBIT Working capital changes (154) Net int income/(expense) (110) (101) (106) (102) (98) Cash tax paid (649) (653) Associates' contribution Others 1,213 1, Exceptional Items (18) (31) Cashflow from operations 4,107 4,073 3,767 4,036 4,053 Pretax profit Capex (978) (1,512) (1,350) (1,200) (1,200) Tax (144) (203) (214) (165) (175) Disposal/(purchases) Minority interest (2) (2) (2) 5 (2) Others (254) (367) (817) - - Net profit Cash flow from investing (1,232) (1,879) (2,167) (1,200) (1,200) Core net profit Debt raised/(repaid) 1, Equity raised/(repaid) Margins (%) Net inct income/(expense) EBITDA Dividends paid (3,002) (1,501) (1,501) (1,501) (1,501) PBT Others (626) (1,611) (502) (514) (514) Net profit Cash flow from financing (2,152) (2,429) (1,503) (2,015) (2,015) Free Cash Flow 3,129 2,562 2,417 2,836 2,853 Source: Company, Affin Hwang forecasts Page 20 of 22

21 TM FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE Dec (RMm) E 2017E 2018E FYE Dec (RMm) E 2017E 2018E Revenue 11,235 11,722 11,849 11,900 11,937 Growth Operating expenses (7,540) (8,165) (8,219) (8,117) (8,087) Revenue (%) EBITDA 3,695 3,557 3,631 3,782 3,850 EBITDA (%) 3.1 (3.7) Depreciation (2,341) (2,437) (2,363) (2,453) (2,509) Core net profit (%) (10.1) (17.2) (0.8) EBIT 1,353 1,119 1,267 1,330 1,340 Net interest income/(expense) (155) (159) (190) (254) (237) Profitability Associates' contribution EBITDA margin (%) Exceptional Items (102) (73) PBT margin (%) Pretax profit 1, ,120 1,076 1,103 Net profit margin (%) Tax (263) (320) (410) (378) (387) Effective tax rate (%) (23.8) (35.1) (36.6) (35.1) (35.1) Minority interest (11) ROA (%) Net profit Core ROE (%) ROCE (%) Balance Sheet Statement Dividend payout ratio (%) FYE Dec (RMm) , E 2017E 2018E Fixed assets 14,785 15,187 14,724 14,111 13,442 Liquidity Other long term assets Current ratio (x) Total non-current assets 15,487 15,988 15,525 14,913 14,243 Op. cash flow (RMm) 3,014 2,942 2,594 3,407 3,464 Cash and equivalents 2,986 3,512 1,788 2,085 2,434 Free cashflow (RMm) ,567 1,624 Stocks FCF/share (sen) Debtors 2,825 2,947 2,979 2,992 3,001 Other current assets 1,209 1,729 1,729 1,729 1,729 Asset managenment Total current assets 7,136 8,425 6,736 7,046 7,406 Debtors turnover (days) Creditors 3,605 4,367 3,733 3,749 3,761 Stock turnover (days) Short term borrowings Creditors turnover (days) Other current liabilities 1,055 1,047 1,047 1,047 1,047 Total current liabilities 4,857 5,823 5,189 5,205 5,216 Capital structure Long term borrowings 6,589 7,497 6,199 6,099 5,999 Net gearing (%) Other long term liabilities 3,606 3,313 3,213 3,113 3,013 Interest cover (x) (12.7) (11.0) (11.0) (11.6) (12.0) Total long term liabilities 10,195 10,810 9,412 9,212 9,012 Shareholders' Funds 7,571 7,781 7,660 7,542 7,421 Quarterly Profit & Loss FYE 31 Dec (RMm) 3Q15 4Q15 1Q16 2Q16 3Q16 Cash Flow Statement Revenue 2,923 3,184 2,855 3,045 2,923 FYE Dec (RMm) , E 2017E 2018E Operating expenses (2,005) (2,315) (1,897) (2,099) (1,972) EBIT 1,353 1,119 1,267 1,330 1,340 EBITDA Depreciation & amortisation 2,341 2,437 2,363 2,453 2,509 Depreciation (589) (621) (643) (673) (634) Working capital changes (66) 519 (668) 2 2 EBIT Cash tax paid (263) (320) (410) (378) (387) Net int income/(expense) (43) (41) (48) (58) (57) Others (351) (814) Associates' contribution Cashflow from operations 3,014 2,942 2,594 3,407 3,464 Exceptional Items (34) (28) (49) Capex (2,101) (2,547) (1,900) (1,840) (1,840) Pretax profit Disposal/(purchases) Tax (124) (66) (103) (97) (100) Others (62) (3) Minority interest Cash flow from investing (2,162) (2,550) (1,900) (1,840) (1,840) Net profit Debt raised/(repaid) (209) 466 (100) (100) (100) Core net profit Equity raised/(repaid) Net int inc/(expense) (155) (159) (190) (254) (237) Margins (%) Dividends paid (932) (848) (930) (917) (937) EBITDA Others PBT Cash flow from financing (391) 143 (1,220) (1,271) (1,274) Net profit Free Cash Flow ,567 1,624 Source: Company, Affin Hwang forecasts Page 21 of 22

22 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, Kuala Lumpur. affin.research@affinhwang.com Tel : Fax : Page 22 of 22