TELECOMMUNICATIONS Case for Consolidation

11 August 2020

In this report:

Competition-driven consolidation on the cards?

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FORIMPORTANT DISCLOSURES

Tuesday, 11 August 2020

Alex Goh Senior vice-president, Equity Domestic [email protected] 03-2036 2280 Summary

 We have undertaken an analysis of consolidation prospects for the sector given the unrelenting price pressures in the cellular sector and increasingly in the fixed broadband market with the emergence of new players. Multiple synergistic benefits for consolidation, which could re-rate the sector and attract needed investments for upcoming 5G rollouts, are:

 Offering consumers a comprehensive suite of cellular and fibre broadband services to provide back-up support service support, especially for critical enterprise solutions;

 Revitalising top-line growth by lowering competitors, re-establishing monopolies or offering a dual-branding strategy;

 Intensifying cost efficiencies by reducing overheads given redundancies in head office, marketing and service stations;

 Generating economies of scale from a bulk purchasing and streamlining of cost centres;

 Improving investment and credit rating profiles from enlarged market capitalisation and stronger balance sheets.

 Various M&A permutations are possible among the 6 main operators with substantive network infrastructure and subscriber market share. We have narrowed down the possibilities into 3 scenarios:

 Scenario 1: Revisiting the Telekom Malaysia (TM) & Axiata re-merger. Assuming a 10% cost reduction would mean substantial annual savings of RM2.2bil and together with a targeted FY21F EV/EBITDA of 5x could drive up the combined market capitalisation by 52%.

 Scenario 2: Relooking the Axiata & Telenor-Digi merger. Management from the earlier abortive merger guided for 5-year synergies up to RM15–20bil in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale. This alone translates to a DCF enhancement of 24%–32% from the combined Axiata-Digi market capitalisation.

 Scenario 3: TM and Time dotCom merger. If the merged entity is able to reduce Time's operational costs by 20% while re-establishing TM's fibre monopoly in the metropolitan areas of the Klang Valley, Penang and Johor, we estimate that the merged entity's DCF/share could reach RM5.00, based on a WACC of 7.4% and terminal growth rate of 2% post-FY25F, implying a potential upside of 28% and catalysing a re-rating on TM. This could lead to an even larger consolidation given that Khazanah Nasional is a substantial shareholder for Axiata, TM and Time.

 A key hurdle could be the regulator, the Malaysian Communications and Multimedia Commission’s (MCMC) refusal to grant approval for the consolidation in the fibre broadband market given its agenda to encourage more competition amongst the incumbents as part of its overall strategy to lower costs and deliver improved services. Hence, until such consolidation actually emerges, we maintain our NEUTRAL outlook on the sector given the unmitigated mobile competition amid escalating capex requirements against the backdrop of the National Fiberisation and Connectivity Plan (NFCP) agenda to improve national connectivity and affordability. For now, our only BUY is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

AmInvestment Bank Bhd 2

Tuesday, 11 August 2020

Alex Goh Senior vice-president, Equity Domestic [email protected] 03-2036 2280 Summary

 Offering consumers a comprehensive suite of cellular and fibre broadband services to provide back-up support service support, especially for critical enterprise solutions;

 Revitalising top-line growth by lowering competitors, re-establishing monopolies or offering a dual-branding strategy;

 Intensifying cost efficiencies by reducing overheads given redundancies in head office, marketing and service stations;

 Generating economies of scale from a bulk purchasing and streamlining of cost centres;

 Improving investment and credit rating profiles from enlarged market capitalisation and stronger balance sheets.

 Various M&A permutations are possible among the 6 main operators with substantive network infrastructure and subscriber market share. We have narrowed down the possibilities into 3 scenarios:

AmInvestment Bank Bhd 2

Table of Contents

 Telecommunications Sector ...... 4  Axiata Group ...... 18  Digi.Com ...... 22  Maxis ………...... 27  Telekom Malaysia ...... 32  Disclosure and Disclaimer

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TELECOMMUNICATION

Sector report Competition-driven consolidation on the cards? 11 Aug 2020 NEUTRAL Alex Goh (Maintained) [email protected] 03-2036 2280 Rationale for report: Sector update Investment Highlights

 Unrelenting competition points towards consolidation. We have undertaken an analysis of consolidation prospects for the sector given the unrelenting price pressures in the cellular sector and increasingly in the fixed broadband market with the emergence of new players. Amid the intense mobile competition with U Mobile, Digi has halved its entry-level plans for both postpaid and prepaid packages in an attempt to stave off the loss in market share. In the fibre broadband market, TM’s unifi has been more aggressive in competing for market share with recent promotions of free 42’ Sharp TV sets and redemption of the RM500 penalty fee for switching from Maxis Home Fibre. In Peninsular Malaysia, Celcom and Digi have begun to target selectively market segments in the Klang Valley for their fibre-to-home offerings. Over the past year, more players, including TM, are beginning to encroach into Time dotCom’s niche target in high-rise and dense developments, including new property launches that will require much longer investment payback periods.  Multiple synergistic benefits for consolidation which could re-rate the sector and attract needed investments for upcoming 5G rollouts, are:  Offering consumers a comprehensive suite of cellular and fibre broadband services to provide bundling promotions and back- up support service support, especially for critical enterprise solutions;  Revitalising top-line growth by lowering competitors, re-establishing monopolies or offering a dual-branding strategy;

 Intensifying cost efficiencies by reducing overheads given redundancies in head office, marketing and service stations;  Generating economies of scale from bulk purchasing and streamlining of cost centres;  Improving investment and credit rating profiles from enlarged market capitalisation and stronger balance sheets.

 Various M&A permutations are possible among the 6 main operators with substantive network infrastructure and subscriber market share. Amongst the operators, we view Maxis, which currently has the leading market and revenue share, as not a likely candidate for M&A. Over the past years, Maxis has successfully leveraged its convergence strategy with fibre offerings, premium cellular connectivity and strong customer service support to penetrate the fixed broadband market while leasing the High Speed Broadband (HSBB) network from TM. We have narrowed down the possibilities into 3 probable scenarios:

Scenario 1: Revisiting TM & Axiata re-merger. Assuming a 10% cost reduction would mean a substantial annual savings of RM2.2bil and together with a targeted FY21F EV/EBITDA of 5x could drive up the combined market capitalisation by 52%. Scenario 2: Relooking Axiata & Telenor-Digi merger. Management from the earlier abortive merger guided for 5-year synergies up to RM15–20bil in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale. This alone translates to a DCF enhancement of 24%–32% from the combined Axiata–Digi market capitalisation. Scenario 3: TM and Time dotCom merger. If the merged entity is able to reduce Time's operational costs by 20% while re- establishing TM’s fibre monopoly in the metropolitan areas of the Klang Valley, Penang and Johor, we estimate that the merged entity's DCF/share could reach RM5.00, based on a WACC of 7.4% and terminal growth rate of 2% post-FY25F, implying a potential upside of 28% and catalysing a re-rating on TM. This could lead to an even larger consolidation given that Khazanah is a substantial shareholder for Axiata, TM and Time.  MCMC restraint. A key hurdle could be the regulator, the Malaysian Communications and Multimedia Commission’s (MCMC) refusal to grant approval for any telco consolidation given its agenda to encourage more competition as part of its overall strategy to lower costs and deliver improved services. Hence, until such consolidation actually emerges, we maintain NEUTRAL on the sector given the unmitigated mobile competition amid escalating capex requirements against the backdrop of the National Fiberisation and Connectivity Plan (NFCP) agenda to improve connectivity and affordability. For now, our only BUY is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

EXHIBIT 1: VALUATION MATRIX Price FV Up/down Mkt Cap Enterprise Val. EV/EBITDA (x) EPS growth (%) PE (x) ROE (%) NDPS (sen) Div Yld (%) Net debt/FY20F side Stocks Call (RM) (RM) (%) (RMmil) FYE (RMmil) FY20F FY21F FY20F FY21F FY20F FY21F FY20F FY20F FY20F EBITDA (x) Axiata BUY 3.19 4.50 41.1 29,232 Dec 41,834 4.0 3.8 (49.1) 20.5 39.4 32.7 3.4 9.5 3.0 1.6 Maxis HOLD 5.18 5.50 6.2 40,490 Dec 48,855 13.2 12.3 19.0 20.3 27.2 25.6 20.3 19.0 3.7 2.4 Digi HOLD 4.21 4.40 4.5 32,733 Dec 37,425 11.8 11.4 (13.5) 7.2 26.4 24.6 223.9 15.9 3.8 1.4 Telekom HOLD 3.77 4.15 10.1 14,168 Dec 21,242 5.5 5.3 22.2 23.0 17.0 16.4 10.2 10.0 2.7 1.6 Source: AmInvestment Bank Telecommunication Sector 11 Aug 2020

CONSOLIDATION RULES Achieving these targets requires:

 Unrelenting competition points towards i) heavy investments which could reach RM21.6bil, of consolidation which RM10–RM11bil will be funded from the MCMC’s Universal Service Provider fund; We have undertaken an analysis of consolidation prospects for the sector given the unrelenting price pressures in the ii) sharing access to passive telco and civil infrastructure cellular sector and increasingly in the fixed broadband amongst operators and stakeholders; market with the emergence of new players. iii) continuous technology improvements; Amid the intense mobile competition with U Mobile, Digi has halved its entry-level plans for both postpaid and prepaid iv) optimising spectrum allocation for higher quality packages in an attempt to stave off the loss in market share. services; Recall that Digi recently launched a postpaid package priced at RM38/month for 9GB of data and unlimited calls, v) improved regulatory framework and policy certainty to halving its current postpaid offering of RM80/month for support new investments in 5G; 40GB base data with another 40GB loyalty data. vi) reduction of costly and uncoordinated state-level right- In June this year, Digi also launched its Internet Chili Padi of-way in building telco infrastructure; and prepaid plan offering 3GB and unlimited social media (Facebook, Instagram and Twitter) at only RM15/month, vii) improved regulatory coherence and consolidate action half of its 2QFY20 prepaid ARPU of RM29/month. from all stakeholders to address issues on the ground.

In the fibre broadband market, TM’s unifi has been more Under the 11th Malaysia Plan, gross national income (GNI) aggressive in competing for market share with recent is expected to reach RM47,720 by 2020. An entry-level promotions of free 42’ Sharp TV sets and redemption of the package amounting to 1% of GNI translates to only RM500 penalty fee for switching from Maxis Home Fibre. RM40/month.

In Peninsular Malaysia, Celcom and Digi have begun to This is half of TM’s unifi Basic plan currently priced at target selectively market segments in the Klang Valley for RM79/month for 60GB data vs. Celcom’s RM80/month for their fibre-to-home offerings. 30Mbps, Maxis’ RM89/month for 30Mbps, Time dotCom’s RM99/month at 100Mbps and Digi’s RM99/month at  NFCP initiatives drive pricing points lower and 50Mbps. consolidation  Implementation of MSAP slashed retail prices The government’s NFCP, which was launched in September 2019, delineated 5-year targets as follows: Under the former Pakatan government, Malaysia proceeded with the MCMC’s Mandatory Standard on i) Entry-level fixed broadband packages at 1% of gross Access Pricing (MSAP), which led to a sharp drop in prices national income (GNI) by 2020; of fixed broadband services, triggering a shift in consumer demand for faster internet in 2018. ii) Gigabits availability in selected industrial areas by 2020 and state capitals by 2023; A World Bank report highlighted Malaysia’s lag in internet speed partly stemming from limited competition in the iii) 100% availability at a minimum speed of 500Mbps in broadband market as TM dominated fiberised broadband state capitals and selected high-impact areas by 2021; with a 90% market share in 2017. Back then, Malaysia had the most concentrated fixed broadband market in all of Asia iv) 20% availability at up to 500Mbps in sub-urban and rural Pacific for a country with a population over one million. areas by 2022; Limited competition and difficulties in network deployment v) Fibre network coverage at 70% of schools, hospitals, constrained alternative internet service providers (ISPs) libraries, police stations and post offices by 2022; from rolling out networks or offering services on competitive terms. vi) Average speeds of 30Mbps in 98% of populated areas by 2023; and The MSAP regulates the prices and terms for alternative ISPs to access the incumbent’s wholesale broadband vii) Improved mobile coverage along the Pan Borneo capacity. Fixed broadband connection quality, including Highway upon completion. that of fiber internet services, rapidly responded to these regulatory changes. Under the NFCP, the current 1.9mil premises with fibre access have to be increased by 1.5mil by 2021, 502K Within months, local service providers announced new premises with gigabits access to be increased by 3mil by broadband subscription plans with faster speeds at lower 2023, expand 25 industrial areas for gigabits access by next prices across all packages. The average price for basic year, 121K suburban and rural premises to be increased by broadband services at 30Mbps services fell by over 30% in 1.2mil by 2022, another 6,195 towers (+18%) to be built by 2018 and over 40% for speeds in excess of 1Gbps. 2023 to expand 4G + coverage, and to widen coverage to 1,177 Felda and Orang Asli settlements by 2023.

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Telecommunication Sector 11 Aug 2020

WHY NOW?  Intensify cost efficiencies by reducing overheads given  Investments for 5G rollouts redundancies in head office, marketing and service stations; The National 5G Task Force of the MCMC had earlier indicated that RM7–8bil investment for 5G deployment in  Generate economies of scale from bulk purchasing Malaysia, which in our view, is likely for targeted sites for and streamlining of cost centres; high data usage. Our channel checks with industry sources have also indicated that the capex per square km could be  Improved investment and credit rating profiles from 10x higher than that for 4G for selected locations. enlarged market capitalisation and stronger balance sheets for increased 5G capex rollouts. Over the past 5–6 years, we estimate that 4G capex spent by telcos has already surpassed RM15bil to date on a Given the increasingly difficult operating conditions faced nationwide coverage programme. However, additional by the current operators, various merger and acquisition spending for 4G is still required given that only 40% of (M&A) permutations are possible among the 6 main mobile towers in the country are fiberised, which has operators with substantive network infrastructure and resulted in sub-optimal speeds and connectivity for 4G subscriber market share. services. Evidently, a substantively higher proportion of fiberised mobile towers is needed to deploy 5G services. However, we have narrowed down the possibilities into 3 probable scenarios for sector consolidation as follows: In view of the need for yet greater levels of investments in the 5G sector, the industry needs to reinvigorate its revenue 1: Revisiting TM & Axiata re-merger trajectory and optimise its costs structure, emphasising the need for consolidation amongst the key players. 2: Relook at Axiata & Telenor-Digi merger

 Just starting with the lower 5G bandwidth 3: TM and Time dotCom merger.

In our view, MCMC’s low initial 5G investment estimate  Maxis likely to opt out of M&A for now could involve only the 700MHz and 3.5GHz bands which are planned to be awarded to a consortium of multiple Amongst the operators, we view Maxis, which currently licensees, including foreign operators. has the leading market and revenue share, as an unlikely candidate at this juncture to initiate M&A activities, MCMC has identified 700MHz, 3.5GHz, 26GHz and 28GHz preferring to build up its revenue trajectory organically. for 5G usage, wherein the two higher 26GHz and 28GHz bands will be assigned through a tender process to Over the past years, Maxis has successfully leveraged its licensees and 3rd parties which include non-licensees for convergence strategy with fibre offerings, premium the purpose of localised networks. cellular connectivity and strong customer service support to penetrate the fixed broadband market, even while A total bandwidth of 3200MHz for the two higher 5G bands leasing the HSBB from TM. – 26GHz and 28GHz – will be assigned via two methods: i) a tender process (“beauty contest”) for 4 blocks of 400MHz In 1Q2020, Maxis’ subscriber market share of 37.2% has (1600MHz in total) of the 24.9GHz to 26.5GHz frequency finally overtaken Digi’s 36.4% while Celcom remained a bands on a nationwide basis; and ii) first-come-first-served distant third at 26.4%. Additionally, Maxis remains the basis for four blocks of 400MHz (1600MHz in total) of the leader in the postpaid segment with an ARPU and remaining 26.5Hz to 28.1GHz frequency bands and open subscriber base which are higher by 23% and 24% to any parties which include non-licensees for the purpose respectively compared to Digi’s. of deploying localised or private networks. Since 1Q2016, Digi has held the leading subscriber Recall that this single-entity approach was envisioned to market share due to its strength in the prepaid segment, minimise costs and prevent duplication of infrastructure underpinned by the migrant population. However, Digi’s against the backdrop of additional spending requirements position has been overtaken as Maxis’ postpaid to enhance 4G networks. However, under the new federal subscriber focus and convergence strategy with its fibre government, the regulator is currently reviewing this broadband services has worked out better than Digi and strategy. Celcom’s.

 Synergies abound from consolidation POTENTIAL ROADBLOCK The multiple synergistic benefits in opting for consolidation are:  Contrary to MCMC’s agenda  Offering consumers a comprehensive suite of cellular and fibre broadband services to provide bundling The key hurdle for consolidation in the mobile and fibre promotions and back-up support service support, broadband sector would be the MCMC’s refusal to especially for critical enterprise solutions. approve any prospective merger given its objective to  Revitalise top-line growth by reducing the number of achieve a 95% broadband coverage via fixed, wireless competitors, re-establishing monopolies or offering a and mobile solutions for the whole country, including East dual-branding strategy; Malaysia under the 11th Malaysia Plan.

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Telecommunication Sector 11 Aug 2020

Recall that the plan involved key infrastructure rollout and performance management office vice-president and initiatives such as HSBB 2, SUBB and Digital Terrestrial consumer EVP. Television (DTT) together with policies to improve access pricing and consumer protection frameworks. As Imri was briefly Axiata Group’s COO just before his reinstatement as TM’s CEO, we believe that the possibility To this end, the regulator’s strategy, encouraged by the has heightened for a re-merger review. World Bank’s study, is to introduce new entrants in broadband, wireless, LTE or mobile virtual network  Complementary merger operator (MVNOs). Given that Axiata was formerly part of TM in 2008, we view Hence, the MCMC has not adopted a preference for that the usual management dysfunctions arising from a mergers but instead spur increased competition amongst text-book merger case can be significantly reduced, as the incumbents as part of its overall strategy to lower costs this will simply mean a reintroduction for the bulk of the and deliver improved services. two companies’ employees and mid-level leadership.

The main synergistic benefits from a merger will be the complementary suite of services which Axiata’s mobile SCENARIO 1: TM & AXIATA RE-MERGER services can integrate with TM’s fixed line operations, and the combining of Celcom and unifi Mobile’s operations.  Convergence-driven merger Essentially, TM, which dominates the fixed line and fibre Back in March 2017, the news media reported that Axiata broadband business, can repackage and bundle its Group and TM may be in the midst of a re-merger after its product suite and billing system with discounted mobile 2008 de-merger. Khazanah owns equity stakes of 38% in services from Celcom’s extensive service coverage in Axiata and 26% in TM. Malaysia, which is what the group is currently undertaking with unifi Mobile. The driving factors for the reintegration stems from TM’s own convergence drive amid a slowdown in the sector’s  Faster path to convergence revenues compounded by the difficulties in monetising rapidly increasing mobile data demand. With unifi Mobile expected to break even next year and a mobile subscriber base of 1mil that is still lagging far Over the past 5 years, the revenue for Axiata’s wholly- behind the 4 main players, Axiata’s regional presence will owned Celcom contracted by an FY14/FY19 CAGR of provide a much faster path to TM’s convergence strategy 2.8% and 9.9% YoY while TM was flattish at a marginal by offering a unified suite of services to customers. growth of 0.4%. Within the merged entity, unifi Mobile’s branding may be  TM’s management changes could ease transition repositioned under Celcom to a more focused clientele in residential homes and small-medium scale businesses. Following an unusual turn of events, TM’s former acting chief executive officer (CEO) Imri Mokhtar has returned to  Stronger position to challenge peers helm the group as its managing director/group CEO, effective 1 August 2020. The current MD/group CEO By offering a converged suite of products, the merged Datuk Noor Kamarul Anuar Nuruddin has resigned entity is poised to compete with a stronger platform to effective 29 July 2020 after 13 months in his position. draw further mobile market share from the other players Maxis, Digi and U Mobile. Recall that Imri, who was TM’s acting CEO from November 2018 until June 2019 and originally chosen by Such faster revenue growth is only likely to materialise in the Ministry of Finance to be the CEO, eventually resigned 2–3 years after the merger from customer awareness and from the group after being reassigned as its chief acceptance of the new product offerings. We note that a operating officer (COO) on 30 January this year. 1% revenue improvement translates to a relatively slight RM337mil. Even so, we expect improving clarity to top- Imri, 47, was initially appointed as acting group CEO line prospects to recatalyse market excitement. following the resignation of Datuk Bazlan Osman in November 2018.  Short-term boost from cost efficiencies

After the appointment of Noor Kamarul as CEO in June The more immediate earnings impact to the merged group last year, Imri resumed his post as TM’s COO. According will stem from cost savings. The merger of formerly two to media reports then, TM chairman Rosli Man had separate groups of companies is likely to generate cost refused to proceed with Imri's appointment as group CEO efficiencies from the reduction in redundancies for head despite the approval of the group's special shareholder, office expenses, marketing costs and procurement the Minister of Finance Inc. management which can be further augmented by the sharing of facilities and resources. During his tenure as TM’s COO, Imri was responsible for the business operations of unifi, TM ONE, TM Global Assuming a 10% cost reduction would mean substantial clusters and IT & NT of TM Group. Having first started his annual savings of RM2.2bil and together with a targeted career with TM in 1996 and rejoining the group in 2005, FY21F EV/EBITDA of 5x could drive up the combined Imri has served in various positions, including programme market capitalisation by 52%.

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Telecommunication Sector 11 Aug 2020

 Swap or SPV? SCENARIO 2: AXIATA & TELENOR-DIGI MERGER One option could be to inject Celcom into TM through a share swap so that a single company owns all the  Never say never Malaysian-based operations. Hence, Axiata could resume its focus on regional businesses. In May last year, Axiata Group and Norway-based Telenor Group, which owns a 49% equity stake in Digi.Com, In the past, sensitivities on security were raised when proposed a merger of their operations that would have foreign-based management was involved in the pre- created the largest telecommunications group in the demerged Telekom, which was the national network’s country. operator back in 2008. However, both parties mutually agreed to end discussions Another option could be the formation of special purpose for a merger of their telecommunications and vehicle (SPV) to acquire Celcom from Axiata and TM’s infrastructural assets in Asia after 4 months of due mobile service unit. diligence and finalising the transaction details.  Net debt/EBITDA While we understand that the failure stems from complexities in the proposed mega-merger such as While the combined entity’s net debt/EBITDA of 1.3x will potential job losses from right-sizing initiatives and non- still be high relative to Digi’s 0.7x, it will still be lower than competitiveness of worried local vendors for Celcom, the Maxis’ 2x currently. parties did not rule out a future deal as their CEOS still positively viewed the value-accretive strategic rationale of Although lower dividend payout remains a possibility the deal. given the needed capex requirement for 5G, HSBB2, SUBB, new spectrum acquisitions and tower rollouts, we  Cutting down the number of competitors expect a stronger credit rating for a larger integrated entity to secure better interest rates from external funding If Telenor and Axiata would revisit their proposed merger requirements. under the new federal government, this will lead to an entity with a pro-forma revenue of over US$12bil

(RM50bil) and EBITDA of over US$4.8bil (RM20bil) with operations in 9 countries servicing 300mil customers.

By adopting the earlier swap arrangements, Telenor could be the majority shareholder of the merged entity with an EXHIBIT 2: MERGER’S EXPECTED IMPACT equity stake of 56.5% while Axiata could own 43.5%. Axiata would be offered the position of chairman in the FY21F (RMmil) Axiata TM Total merged entity with the CEO and CFO roles to Telenor. Revenue 25,749.3 11,419.1 37,168.4

Operating costs (14,793.3) (7,418.9) (22,212.3) This deal will directly reduce the number of competitors, effectively enabling the merged entity to leapfrog to the EBITDA 10,955.9 4,000.2 14,956.1 top position in terms of market share in each country involved in the merger. Pretax profit 1,471.9 1,199.4 2,671.4  Aspiring for pole position Normalised net profit 1,059.8 862.6 1,922.4 The merged entity would emerge as the largest cellular FY19 Net debt 12,602.2 7,073.9 19,676.0 operator in Malaysia, Nepal, Cambodia, Myanmar, Sri Current market cap 28,865.3 14,656.2 43,521.5 Lanka and Bangladesh. It would be ranked second in Indonesia and Pakistan while being the third largest player Enterprise value 41,467.4 21,730.1 63,197.5 in Thailand.

EV/EBITDA based on current market price 4.2 The entity would also be the 4th largest tower company EV based on EV/EBITDA of 5x 74,780.5 with 50–60K towers which could mean higher valuations for a future listing exercise. Estimated market cap 55,104.5 However, Robi, the second largest mobile operator in Estimated market cap enhancement 27% Bangladesh, was excluded as its inclusion which will lead Assumption: to an unacceptably huge combined market share with the 10% cost efficiencies in operational costs 2,221.2 largest player, Grameenphone, of which 55.8% is held by Telenor. Improved EBITDA 17,177.3 In Malaysia, the merged revenue of RM14mil will mean Estimated market cap 66,210.6 the largest telecommunication market share (including TM and Time dotCom) of 35% and a dominant mobile share Estimated market cap enhancement 52% (including U Mobile) of 53%. Its combined subscriber base Source: AmInvestment Bank of 20.7mil translates to a commanding market share of 55%.

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Telecommunication Sector 11 Aug 2020

 Improved financial capabilities Given that Khazanah, which owns a 26.2% stake in TM and 20% effective stake in Time, a merger can be realised via Under Scenario 2, we estimate that the merged entity’s TM acquiring 40.2% equity stake from Khazanah and Pulau FY21F net debt/EBITDA could reach 1.6x vs. Axiata’s 1.9x Kapas Ventures (PKV). currently, and Digi’s lower 1.4x. The shareholders of PKV, which have a 29.4% direct stake With an enlarged market capitalisaiton, this could provide in Time, are Global Transit International (GTI) with a 70% additional financial headroom to invest into new growth stake and Khazanah 30%. Time CEO Afzal Abdul Rahim areas such as enterprise and home fixed broadband owns a controlling stake in GTI while executive director services. The entity’s combined US$6bil capex could be Patrick Corso has a minority position. Separately, optimised while procurement synergies could lead to Khazanah also owns an additional 10.8% direct equity lower overall costs. stake in Time which translates to an effective stake of 19.7% in Time. Management earlier indicated that the merged entity will enjoy 5-year synergies up to RM15–20bil in present value  Driven by rising all-round competitive pressures from network efficiencies, cost avoidance, procurement optimisation and economies of scale. Time has demonstrated rapid growth given its low base in enterprise and retail, driven by the global trend of escalating These synergies could mean a DCF enhancement of data needs driven by digital, video-on-demand, social 24%–32% from the combined market capitalisation of platforms and online services. both companies.

 Better for Axiata than for Digi The above-peer growth was partly supported by Time’s strategic advantage in targeting high-rise developments The potential synergies and cost savings is likely to have and mass dwelling units in metropolitan areas in the Klang a higher boost to Axiata, which currently trades at an Valley, Penang and Johor. This was a niche area which TM EV/EBITDA of only 5x, less than half of Digi’s 11x. had lagged in the past due to the high costs involved in Additionally, the merged entity’s expanded financial replacing copper wires with fibre optic lines. leverage comes from Digi’s low gearing which could subsequently raise the merged entity’s dividend policy. In FY16–FY19, Time’s revenue grew by a 3-year CAGR of 13%, driving its normalised net profit growth of 10.4%. In Also, with Telenor's proven track record and joint contrast, TM’s declined by a CAGR of 1.8% over the same management role, we expect a narrowing of Axiata's period due to contracting demand for voice, low-speed discount to its SOP given the reduced exposure to copper-based data, consumers switching to mobile overseas assets which bear higher risk. services and the impact of MSAP on Streamyx and unifi prices.  Regulators remain key hurdle Nevertheless, TM has undertaken substantive cost-cutting We are uncertain if the MCMC and current political regime initiatives with the group’s Performance Improvement would approve this proposal given that a merger would Programme over the years, which led to a 3-year reduce the level of competition at the expense of FY16/FY19 CAGR normalised earnings growth of 5.7%. consumers’ choice and pricing alternatives. However, Time’s impressive growth could potentially slow We reiterate our view that such an extensive restructuring down over the next 3 years, given that its earlier rapid exercise could be hindered by each country's regulatory growth partly stemmed from its low subscriber base while oversight. the MSAP wholesale price cuts have levelled the competitive landscape.

Over the past year, more players including TM, are SCENARIO 3: TM–TIME MERGER beginning to encroach into Time’s niche target in high-rise and dense developments, including new property launches  Aiming for fiberised dominion that will require much longer investment payback periods.

TM still aspires to be the convergence champion by offering As such, we would not be surprised if Time’s substantial quad-play digital and smart services on a nationwide scale. shareholders are looking to divest their investments. As the owner of the HSBB, HSBB 2 and Suburban Broadband (SUBB) networks spearheading the NFCP, we  What’s in it for TM? believe that the group would seriously consider re- establishing its fibre monopoly in the metropolitan areas of The benefits to TM acquiring Time would be from: the Klang Valley, Penang and Johor, which were successfully penetrated by Time over the past 10 years. 1) Entrenching its fibre monopoly in the Klang Valley, Penang and Johor, which TM had partly lost to Time in While securing additional wholesale fibre capacity, which the metropolitan areas, alleviating rising competition will be needed for 5G backhaul services, TM could also amongst the new entrants to the segment. secure synergies via cost-efficiency gains and improved credit rating profile.

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Telecommunication Sector 11 Aug 2020

2) Securing additional wholesale fibre capacity from Time, general offer for the remaining shares in Time in exchange which will be needed for 5G backhaul services. This will for TM’s shares. enable TM to position itself as a one-stop centre for this key nationwide distribution system; Assuming current market valuations and interest rate at 5% for the cash acquisition of the initial 40.2% stake in Time, 3) Increasing TM’s footprint in providing data centre we estimate that the merged entity’s EPS will be marginally services, which are already in the group’s portfolio; impacted, while its proforma net debt/EBITDA will increase to 2.0x from TM’s 1.8x currently with the group’s net debt 4) Reduction in operational costs given redundancies in growing by 32% to RM9.3bil. Time’s head office in Shah Alam, marketing costs, backhaul and service stations, as well as lower If valuations remain unchanged, the merged entity’s FY21F headcount; EV/EBITDA will rise to 7.2x from TM’s 5.1x currently largely due to Time’s higher 10.5x together with the additional debt 5) If a merger occurs, the new entity’s expanded market from the cash acquisition of the initial stake from PKV. capitalisation of RM22bil will be able to secure improved investment profile, credit ratings, lower interest costs and additional financial capital for future network expansions. WINNERS & LOSERS

 What are the negatives for TM?  Prime beneficiaries with TM leading

The drawbacks in TM acquiring Time would be: We view TM as the primary beneficiary of such a development given that the group’s fibre monopoly in the 1) Acquiring a pricey asset with decelerating revenue metropolitan areas of Klang Valley, Penang and Johor will growth prospects against the background of intensifying be reasserted, while securing additional wholesale fibre competition from multiple new entrants. capacity which will be needed for 5G backhaul services. Additionally, TM could also secure synergies via cost- 2) TM’s larger group bureaucracy may drown out Time’s efficiency gains and improved credit rating profile. nimble and savvy management culture which has ably exploited TM’s weaknesses in the past. Over the longer term, if the merged entity is able to reduce 3) Possibility of dis-synergies as most mergers in reality Time's operational costs by 20%, we estimate that the fail to generate synergies or economies of scale due to merged entity's DCF/share could reach RM5.00, based on poor execution and the inability of management to a WACC of 7.4% and terminal growth rate of 2% post- change mindsets and cultural habits of the workforce in FY25F, implying a potential upside of 28% and catalyzing a both companies. re-rating on TM.

IMPACT ON EPS AND GEARING  Further M&A excitement for Axiata

 Slight earnings accretion for higher balance sheet We do not see Axiata Group’s wholly-owned Celcom as impact directly benefiting from a potential TM-Time dotCom merger. Celcom first deployed its fibre broadband services We evaluate the impact on the merged entity’ financial in Sabah and subsequently launched it nationwide. ratios assuming TM acquires up to 40.2% stake in Time for Additionally, Celcom currently uses TM’s fibre network for RM2.6bil cash, and subsequently issues a mandatory its backhaul system.

EXHIBIT 3: TIME DOTCOM’S SUBSTANTIAL SHAREHOLDERS Global Transit Khazanah Nasional International Employees Provident Fund 30% 10.8% 70% 11.1%

Kumpulan Wang Pulau Kapas Ventures Persaraan 6.2% 29.4%

Time dotCom

Source: Annual Report, Bursa Malaysia and AmBank Research

AmInvestment Bank Bhd 10

Telecommunication Sector 11 Aug 2020

Nevertheless, given Khazanah’s substantial 38% equity in high-rise and mass dwelling units. Maxis, which enjoys stake in Axiata Group, we do not discount further substantive head start in penetrating the enterprise and consolidation between TM, Time and Celcom which could retail markets with convergence strategies and wireless catalyse even more synergies between fixed, wireless and back-up guaranteed always-on services over a year ago, cellular technologies. will be able to leverage Time’s niche advantage.

With TM's unifi mobile (formerly webe) still bearing Additionally, Maxis can also tap into Time’s fibre network operating losses and struggling to make a significant dent for its 5G backhaul services, taking advantage of its existing in mobile market share, Axiata's regional presence will lease arrangement with TM. provide a much faster path to TM's convergence strategy to offer a unified suite of services to customers.  Loss of bargaining leverage for Digi

The more immediate earnings impact from a merger will be Digi already has fibre collaborations with both TM and Time, cost efficiencies from the reduction in redundancies for which facilitated its home broadband services to residential head office expenses, marketing costs and procurement condominiums and apartments. In September 2019, Digi management. These cost efficiencies can be further Home Fibre was launched – its first commercial home augmented by the sharing of facilities and resources. broadband service in Sabah following its pilot rollouts in Assuming a 10% cost reduction would mean substantial selected areas within the Klang Valley and Melaka. annual savings of RM2.1bil, 7% of the Axiata’s market capitalisation. A consolidation between TM and Time will reduce negotiations to just a single party for Digi, which could erode By offering a converged suite of products, the merged entity its bargaining leverage for fibre access. Additionally, Digi is on a stronger platform, poised to draw further mobile remains a late player in fixed broadband, which may market share from the other players Maxis, Digi and U constrain the group from making significant inroads in the Mobile. retail segment.

Even though such fast revenue growth is only likely to materialise in 2–3 years after the merger, we expect TM’S FIBRE JOURNEY improving clarity to top-line prospects to re-catalyse market excitement. All in, this could spur yet higher M&A  HSBB backbone excitement in the sector, and catalyse re-rating on Axiata’s undervalued cellular operations. Back in September 2008, TM accepted a letter of award from the government to roll out the fibre optic cable-based  Maxis can leverage Time’s network HSBB infrastructure over 10 years at a cost of RM11.3bil, of which the company invested RM8.9bil (79%) and the Back in 2010, TM and Maxis signed a 10-year agreement government RM2.4bil (21%). The aim then was to provide for TM to provide HSBB (Access) services to Maxis. While HSBB network access to over 1.3mil premises by 2012. Maxis has not partnered with Time to offer fixed broadband to the retail segment, we understand that the group has TM was chosen given its near fixed line monopoly in the backhaul arrangements with multiple carriers which may country, which includes last-line connectivity to 4.6mil include Time. homes in which the company owns the telecommunication poles and duct lines linking to industrial, commercial and If TM were to successfully merge with Time, Maxis should residential properties. be able to benefit by leveraging on Time’s niche advantage

EXHIBIT 4: TM’S INTERNATIONAL AND DOMESTIC FIBRE OPTIC NETWORK

Source: TM’s FY19 Annual Report AmInvestment Bank Bhd 11

Telecommunication Sector 11 Aug 2020

As the incumbent national fixed line operator, TM has 28 TIME’S TURNAROUND SUCCESS points of presence worldwide, of which 9 are in Malaysia, with links to over 20 submarine cable systems to 4  Time’s GLC roots international cable landing stations. Founded in 1996, Time was originally a subsidiary of Time Phase one of the HSBB covers the inner Klang Valley, all Engineering (now Dagang NexChange), part of the United key economic and industrial zones throughout the country, Engineers-Renong conglomerate which was involved in the Iskandar Malaysia region, and all public and private highways, construction, hotel, healthcare, institutions of higher education within the rollout areas. telecommunication, oil and gas and banking operations.

The agreement also involved depositing any potential cost Back then, as UEM was the major shareholder of highways saving and fixed revenue due to the government into the called Projek Lebuhraya Utara-Selatan Bhd (PLUS), HSBB 2 (Phase 2) Trust Account, and to repurpose the Expressway Lingkaran Tengah Sdn Bhd (ELITE), Linkedua balance of the allocated funds for telecentres to other Malaysia Bhd (Linkedua), Seremban–Port Dickson initiatives agreed on between TM and the government. Highway (SPDH) Sdn Bhd, Konsortium Lebuhraya Butterworth-Kulim Sdn Bhd and Penang Bridge Sdn Bhd,  Continuation with HSBB2 and SUBB the group had built extensive fibre network trunk lines along these highways. HSBB 2, which is also a 10-year project that began in December 2015, encompasses the expansion of the However, the Asian financial crisis in 1997/98 led to the previous HSBB infrastructure, covering other priority eventual breakup of the heavily geared group. economic areas including state capitals, selected major Nevertheless, Time was leading the industry with its fibre- towns, including passing industrial zones throughout the optic infrastructure that eventually became the backbone of country, passing public universities, institutions of higher the Cross Peninsular Cable System (CPCS), which education, private institutions of higher education, deployed a data network using fibre that offered bandwidth matriculation colleges and other government colleges. that was 1,000x TM’s traditional copper wire.

TM would bear RM1.3bil or 72% of the RM1.8bil cost for The corporate restructuring involving Renong-United HSBB 2 while the government bear RM500mil or 28%. This Engineers-Time Engineering subsequently led Time to be involved 95 additional exchanges and 390,000 premises by acquired by Khazanah Nasional in 2002. 2017.  Turnaround under new management The SUBB project, covering suburban and rural areas, will also be rolled out over a period of 10 years, involving the In October 2007, Khazanah entered into an agreement with upgrading of copper lines to deliver high-speed broadband Global Transit International Sdn Bhd (GTI) and appointed access speeds of up to 20Mbps and up to 100Mbps in areas GTI CEO Afzal Abdul Rahim as Time’s CEO. The corporate deployed with fibre-to-the-home (FTTH) technology, to over exercise also saw Khazanah transferring its 30% stake in 420,000 premises by 2019. Time to a special-purpose vehicle, Pulau Kapas Ventures Sdn Bhd (PK). The total cost of the SUBB investment is RM1.6bil with TM bearing RM1bil (62.5%) and the government RM600mil Khazanah initially owned a 61.2% interest in PK with GTI (37.5%). holding the remaining equity of 39% by injecting its wholly- owned subsidiary, Global Transit Communications Sdn Bhd into PKVSB. The deal provided the change for Afzal to TM will roll out last-mile access network for both HSBB 2 increase his shareholding and become PK’s major and SUBB projects to homes and businesses utilising shareholder if he achieved certain performance targets. FTTH, ethernet-to-the-home (ETTH) and very high speed digital subscriber line 2 (VDSL2) technologies.

EXHIBIT 5: TIME’S CROSS PENINSULAR CABLE SYSTEM & SKR1M

Source: Time’s FY19 Annual Report AmInvestment Bank Bhd 12

Telecommunication Sector 11 Aug 2020

By 2008, Afzal has managed to successfully turn around 2) FASTER system that was completed on June 30, 2016, Time's loss-making operations by cutting costs and boosting trans-Pacific connectivity with its landing point revitalising its wholesale and enterprise divisions while in Japan and other cable systems to extend capacity to embarking on retail offerings. We understand that Asia, as well as major hubs on the US West Coast. Khazanah’s stake in PK has fallen to 30% currently while FASTER is 11,629km long with a capacity of 60Tbps. GTI holds the majority 70%. 3) Asia Pacific Gateway (APG) that connects mainland  Fiberised CPCS backbone China, Hong Kong, Japan, South Korea, Malaysia, Taiwan, Thailand, Vietnam and Singapore with over Time’s flagship trunk fibre network CPCS supports its other 10,400km and a capacity of 54.8Tbps that was access networks Comprising of 5 diverse routes of over completed in 2016.The APG cable consortium includes 16,000km from Thailand to Singapore, the CPCS has Facebook, CAT Telecom, China Telecom, China Mobile landing points around the perimeter of Peninsular Malaysia International, China Unicom, Chunghwa Telecom, KT with two international gateway points from Thailand to Corporation, LG Uplus, NTT Communications, StarHub, Singapore. Global Transit, Viettel and VNPT.

These routes run along both Peninsular Malaysia’s coasts, 4) Asia-Africa-Europe 1 (AAE-1), a 25,000km submarine alongside major highways and via utility corridors with back- cable system from Southeast Asia to Europe across up cable systems into the metropolitan area network within Egypt, connecting Hong Kong, Vietnam, Cambodia, the central business districts of major cities. Malaysia, Singapore, Thailand, Myanmar, India, Pakistan, Oman, UAE, Qatar, Yemen, Djibouti, Saudi Designed as a fully meshed network, the CPCS delivers a Arabia, Egypt, Greece, Italy, and France. The AAE-1 guaranteed near 100% uptime availability. Its highly reliable cable, which has capacity of at least 40Tbps across and resilient trunk network ensures high system availability Asia, Africa and Europe, was completed in July 2017. and minimal system downtime.

The fibre optic submarine telecommunications cable  Rapid growth in wholesale and retail system Sistem Kabel Rakyat 1Malaysia (SKR1M) was completed in June 2017, comprising 2 fibre pairs with an Time’s wholesale business encompasses the sale of initial design capacity of 4 terabit/second (Tbps). The bandwidth to support the data traffic between Indochina and system has a length of 3,800km and is owned and/or Singapore. The group also provides the crucial fibre operated by a consortium consisting of TM and Time. backbone to at least 70% of regional and global Services providers located in the Asia-Pacific region.  Stakes in international submarine connections In early 2010, Time was the first to roll out fibre-to-the-home In addition to its domestic networks, Time also has minor (FTTH) in Mont’Kiara, which was its launch pad for rollouts stakes in 4 international submarine cable systems: to other areas around the Klang Valley. Retail customers in multi-dwelling units such as condominiums have broadband 1) Unity cable between Japan and the US that was access 5x faster than the incumbent’s back then. completed in April 2010 comprising a 10,000km linear cable system with a "multi-terabit" capacity of up to The group continued to aggressively expand and roll out 7.7Tbps. Construction of the cable was funded by a fibre-optic services within the Klang Valley, focusing on consortium formed in February 2008 comprising Bharti strategic locations such as commercial business districts Airtel, Global Transit, Google, KDDI Corporation, and high-rise multi-dwelling properties, where there is a Pacnet and SingTel with an installation cost US$300mil. nascent but receptive market which is unencumbered by large capital requirements.

EXHIBIT 6: TIME’S FINANCIAL PERFORMANCE

RM'000 1,600 1,485 1,367 1,400 1,249 1,200 1,114 983 1,000 861

800 671 571 615 600 480 427 353 389 400 297 289 314 330 175 200

0 FY17 FY18 FY19 FY20F * FY21F * FY22F *

Revenue EBITDA Net profit * based on consensus ` Source: Time’s annual reports & Bloomberg Consensus AmInvestment Bank Bhd 13

Telecommunication Sector 11 Aug 2020

Time provides an extensive product suite, ranging from Now housed under AIMS Data Centre, the data centre floor bandwidth supply via leased lines, satellite-based data space has expanded by 31% over the past 3 years to reach solutions, metro local area networks, through to 78,215 sq ft in 2019. This has propelled the group’s data international private leased circuit services. centre revenues by a 3-year FY16/FY19 CAGR of 11% to RM131mil, accounting for 12% of group FY19 revenue. Working closely with all the major mobile players to fiberise their infrastructure, Time synergistically uses those towers Currently, 73% of the net lettable area are in Menara AIMS for colocation, negating the need for last-mile fibre to its at Changkat Raja Chulan in Kuala Lumpur, 24% in nearest potential customers. These developments have Cyberjaya and the rest in Thailand and Vietnam. catered to mobile players which have 4G rollout plans that are 100% internet protocol-based (IP).  Minimal associate contributions

In FY16–FY19, Time’s revenue grew by a 3-year CAGR of Time also has associate stakes in neighbouring fixed 13%, driving its normalised net profit growth of 10.4%, far broadband operators which provided earnings of RM15mil outpacing other telcos in the country which were only able in FY19. This comprised a 45% equity stake in Vietnam’s to eke out flattish or even slightly negative trends. CMC Telecommunications Infrastructure Corporation and 2 investments in Thailand – 49% in KIRZ Co Ltd, which  Rapidly expanding data centre targets business and home users, and 47% in Symphony Communication Public Company Limited which provides In 2016, Time also became the first data centre in the Asia- wholesale services. Pacific region to partner with Network Infrastructure Inventory Inc to provide an all-in-one platform for IT service Symphony Communication, in which Time invested management, operational support systems and data centre RM280mil for its equity stake, is involved in the 1,300km infrastructure management capabilities. international submarine cable network system called Malaysia-Cambodia-Thailand (MCT) Submarine Cable System – a joint investment project of telecom operators from Malaysia, Cambodia and Thailand. This was Time’s largest overseas investments, compared to US$12mil for CMC and RM10mil for KIRZ.

EXHIBIT 7: TIME’S REVENUE BREAKDOWN BY PRODUCT RM'000 1,000 907 900 777 800 700 666 581 600 525 500 457 412 400 306 300 237 234 200 132 130 95 112 78 77 78 75 71 65 76 77 85 78 69 72 100 34 59 0 6 0 3 2 3 3 5 5 5 5 4 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Voice Data Data Centre Others

Source: Time’s annual reports & Bloomberg Consensus

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Telecommunication Sector 11 Aug 2020

RECOMMENDATION

 NEUTRAL outlook until consolidation actually

materialises

Until consolidation actually emerges among the fibre or mobile players, we maintain our NEUTRAL outlook on the sector given the unmitigated mobile competition amid escalating capex requirements against the backdrop of the National Fiberisation and Connectivity Plan (NFCP) agenda to improve national connectivity and affordability.

For now, our only BUY is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

The sector can be de-rated on the resumption of revenue declines against the backdrop of escalated mobile price war and potential cuts in fixed broadband prices this year under NFCP prerogatives.

We are also cautious on possibilities of higher-than- expected increase in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G rollouts.

However, the sector can be upgraded on renewed consolidation prospects amongst the fibre operators or current 6 main cellular operators which could lead to a moderation in price competition, official suspension of the MCMC’s plans for further broadband price cuts and significant contraction in operating costs from increased infrastructure-sharing arrangements amongst operators.

AmInvestment Bank Bhd 15

Telecommunication Sector 11 Aug 2020

EXHIBIT 8: MOBILE SUBSCRIBERS EXHIBIT 9: MOBILE SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 10: PREPAID SUBSCRIBERS EXHIBIT 11: PREPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 12: POSTPAID SUBSCRIBERS EXHIBIT 13: POSTPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

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Telecommunication Sector 11 Aug 2020

EXHIBIT 14: PREPAID ARPU EXHIBIT 15: PREPAID ARPU CHANGES RM/month QoQ RM/user 4 1.5 3 1.0 2 0.5 1 - 0 (0.5) (1) (1.0) (2) (3) (1.5) (4) (2.0) (5) (2.5) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 16: POSTPAID ARPU EXHIBIT 17: POSTPAID ARPU CHANGES RM/month QoQ RM/month 10 6.0

4.0 5 2.0

- 0 (2.0)

(4.0) (5) (6.0)

(10) (8.0) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 18: BLENDED ARPU EXHIBIT 19: BLENDED ARPU CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 17

TELECOMMUNICATION AXIATA GROUP

(AXIATA MK EQUITY, AXIA.KL) 11 Aug 2020

M&A catalyst Company report BUY

Alex Goh (Maintained) [email protected] 03-2036 2280 Rationale for report: Company update

Investment Highlights Price RM3.19 Fair Value RM4.50 52-week High/Low RM5.08/RM3.01  We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts (SOP) based fair value of Key Changes RM4.50/share, which implies an FY20F EV/EBITDA of 5.3x – 1 Fair value  standard deviation below its 3-year average of 6x. EPS 

YE to Dec FY19 FY20F FY21F FY22F  Amid the unrelenting competition in the cellular sector and now increasingly in the fibre broadband market, we view Revenue (RM mil) 24,583.3 25,022.3 25,749.3 26,522.5 consolidation amongst the key operators as crucial to Core net profit (RM mil) 1,022.0 742.4 894.6 1,171.5 catalyse a re-rating for the sector and attract needed FD Core EPS (sen) 11.2 8.1 9.8 12.8 investments for 5G rollouts. FD Core EPS growth (%) (15.0) (27.4) 20.5 31.0 Consensus Net Profit (RM mil) - 830.7 996.5 1,180.8  As such, we have relooked at 3 probable permutations: 1) DPS (sen) 9.5 9.5 9.5 9.5 PE (x) 28.2 38.9 32.3 24.6 Axiata-TM re-merger; 2) Axiata-Telenor-Digi revisit; and 3) EV/EBITDA (x) 3.8 4.4 4.0 3.7 TM-Time dotCom merger. Div yield (%) 2.9 2.9 2.9 2.9 ROE (%) 8.7 4.7 5.7 7.4  Under options 1 and 2, we view tremendous synergies and Net Gearing (%) 77.9 107.1 95.8 82.1 avenues for cost optimisation (see accompanying sector

Stock and Financial Data update), which should reduce the huge discount in EV/EBITDA valuations between Axiata and Digi (See Shares Outstanding (million) 9,163.6 accompanying Sector Update). Market Cap (RM mil) 29,231.9 Book Value (RM/share) 1.77  Under scenario 3, we do not see Axiata Group’s wholly-owned P/BV (x) 1.8 Celcom as directly benefiting from a potential TM-Time ROE (%) 8.7 Net Gearing (%) 77.9 dotCom merger. Celcom first deployed its fibre broadband services in Sabah and subsequently launched it nationwide. Major Shareholders Khazanah (37.6%) Additionally, Celcom currently uses TM’s fibre network for its EPF (17.6%) backhaul system.

Free Float 0.4 Avg Daily Value (RM mil) 16.6  Nevertheless, given that Khazanah Nasional is the common shareholder of Axiata, TM and Time dotCom, we do not Price performance 3mth 6mth 12mth discount the possibility of a further value-accretive consolidation among the 3 players which could drive more Absolute (%) (19.0) (27.5) (36.9) Relative (%) (29.1) (29.1) (35.4) synergies between fixed, wireless and cellular technologies.

7.0 2,000  With TM's unifi mobile (formerly webe) still bearing operating 1,800 losses with a subscriber base of 1mil currently, Axiata's 6.0 1,600 regional presence will provide a much faster path to TM's 5.0 1,400 convergence strategy to offer a unified suite of services to 1,200 4.0 customers. 1,000 3.0 800  By offering a converged suite of products, the merged entity

2.0 600 is on a stronger platform, poised to draw further mobile 400 market share from the other players Maxis, Digi and U Mobile. 1.0 200 Even though such fast revenue growth is only likely to 0.0 0 materialise in 2–3 years after the merger, we expect improving Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 clarity to top-line prospects to re-catalyse market excitement.

AXIATA MK FBMKLCI Index  For a regional telco operator with excellent opportunities to further monetise its assets and engage in merger and acquisition activities, Axiata currently trades at a bargain FY21F EV/EBITDA of 4x vs. Maxis' 12x. Axiata Group 11 Aug 2020

EXHIBIT 1: AXIATA’S REGIONAL RISK ASSESMENT

Source: Axiata

EXHIBIT 2: OPERATING COMPANIES’ REVENUE BREAKDOWN

Source: Axiata

AmInvestment Bank Bhd 19

Axiata Group 11 Aug 2020

EXHIBIT 3: SUM-OF-PARTS BREAKDOWN Forex Valuation Axiata Effective value Share Operational companies Country rate Methodology (RMmil) Stake (%) (RMmil) % Celcom Malaysia 1 DCF (WACC 7%, Terminal growth 2%) 25,549.3 100.0 25,549.3 52.8 XL Indonesia 3381 Market Value 10,368.8 66.5 6,895.3 14.3 Dialog Sri Lanka 43.4 Market Value 2,533.2 83.3 2,110.7 4.4 Robi Bangladesh 20.3 5x FY20F EV/EBITDA 4,172.4 68.7 2,866.5 5.9 Smart Cambodia 993 5x FY20F EV/EBITDA 2,854.8 87.5 2,496.8 5.2 M1 Singapore 0.33 VGO price from Konnectivity Pte Ltd 28.7 1,656.5 3.4 NCELL Nepal 26.9 5x FY20F EBITDA 5,428.2 80.0 4,342.5 9.0 Axiata Digital Services 10% investment by Mitsui & Co 2,065.0 90.0 1,858.5 Pegasus 7 Ventures Transfer value to management co 578.2 100.0 578.2 Total Equity Value 48,354.3 100.0

Add Shareholders funds as at 31 Dec 2018 16,069.90 Less: Cost of subsidiaries and associates (22,297.60) Less: Additional CGT for Ncell (1,660.52) Less: Investment in Axiata Digital Services (1,007.72) Add: 10% investment by Mitsui & Co into Axiata Digita Services 206.50

Total Sum-of-Parts 39,664.8 No of shares (mil) 8,816.9 Sum-of-parts (RM/share) 4.50 Source: AmInvestment Bank

EXHIBIT 4: PB BAND CHART EXHIBIT 5: PE BAND CHART

3.50 120.00

3.00 100.00

2.50 +1δ 80.00 +1δ Avg 2.00 -1δ 60.00 1.50 40.00 Avg 1.00

20.00 0.50 -1δ 0.00 0.00 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20

Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 -20.00 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

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Axiata Group 11 Aug 2020

EXHIBIT 6: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue 23,885.8 24,583.3 25,022.3 25,749.3 26,522.5 EBITDA 11,003.0 11,032.4 10,413.0 10,955.9 11,435.3 Depreciation/Amortisation (7,644.8) (7,084.2) (7,560.2) (7,938.3) (7,938.3) Operating income (EBIT) 3,358.2 3,948.1 2,852.7 3,017.7 3,497.0 Other income & associates (6,380.4) 432.1 4.4 9.4 13.7 Net interest (1,050.9) (1,508.0) (1,538.2) (1,555.2) (1,632.9) Exceptional items - - - - - Pretax profit (4,073.1) 2,872.2 1,318.9 1,471.9 1,877.8 Taxation (901.6) (1,057.1) (369.3) (412.1) (525.8) Minorities/pref dividends 212.7 (357.5) (207.2) (165.2) (180.5) Net profit (4,762.0) 1,457.6 742.4 894.6 1,171.5 Core net profit 1,190.0 1,022.0 742.4 894.6 1,171.5

Balance Sheet (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Fixed assets 27,399.0 25,819.4 30,202.4 30,559.1 31,113.6 Intangible assets 20,926.7 20,729.6 19,693.2 18,708.5 17,773.1 Other long-term assets 3,227.4 10,468.0 10,506.0 10,548.7 10,596.0 Total non-current assets 51,553.0 57,017.1 60,401.5 59,816.3 59,482.7 Cash & equivalent 5,071.4 4,224.1 1,765.9 5,359.8 9,289.8 Stock 219.1 154.3 109.7 112.9 116.3 Trade debtors 5,115.2 4,865.9 4,113.3 4,232.8 4,359.9 Other current assets 1,896.2 373.3 392.0 411.6 432.2 Total current assets 12,302.0 9,617.6 6,380.8 10,117.0 14,198.1 Trade creditors 12,484.4 12,291.3 10,968.7 11,287.3 11,626.3 Short-term borrowings 4,483.2 7,631.8 8,394.9 9,234.4 10,157.9 Other current liabilities 1,434.5 4,530.5 4,118.0 4,344.9 4,642.4 Total current liabilities 18,402.2 24,453.6 23,481.6 24,866.7 26,426.6 Long-term borrowings 14,646.6 9,194.5 10,113.9 11,125.3 12,237.9 Other long-term liabilities 7,591.6 10,766.6 11,304.9 11,870.2 12,463.7 Total long-term liabilities 22,238.2 19,961.1 21,418.9 22,995.5 24,701.6 Shareholders’ funds 17,476.8 16,180.8 15,635.5 15,659.5 15,960.5 Minority interests 5,737.9 6,039.2 6,246.4 6,411.6 6,592.1 BV/share (RM) 1.93 1.77 1.71 1.71 1.74

Cash Flow (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Pretax profit (4,073.1) 2,872.2 1,318.9 1,471.9 1,877.8 Depreciation/Amortisation 7,644.8 7,084.2 7,560.2 7,938.3 7,938.3 Net change in working capital (139.3) 188.0 118.3 196.0 208.5 Others (1,347.2) (2,368.4) (1,786.6) (1,846.3) (2,030.6) Cash flow from operations 2,085.2 7,776.1 7,210.8 7,759.8 7,993.9 Capital expenditure (6,879.1) (6,711.2) (5,630.0) (6,437.3) (6,630.6) Net investments & sale of fixed assets - - - - - Others - - - - - Cash flow from investing (6,879.1) (6,711.2) (5,630.0) (6,437.3) (6,630.6) Debt raised/(repaid) 1,891.8 2,894.8 1,897.8 2,000.0 2,000.0 Equity raised/(repaid) - - - - - Dividends paid (762.6) (861.7) (870.5) (870.5) (870.5) Others - - - - - Cash flow from financing 1,129.2 2,033.1 1,027.3 1,129.5 1,129.5 Net cash flow (3,664.6) 3,097.9 2,608.1 2,452.0 2,492.7 Net cash/(debt) b/f 744.5 (4,975.4) (3,150.0) (2,071.5) (1,477.3) Net cash/(debt) c/f (2,920.1) (1,877.5) (541.9) 380.5 1,015.5

Key Ratios (YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue growth (%) (2.1) 2.9 1.8 2.9 3.0 EBITDA growth (%) 1.6 0.3 (5.6) 5.2 4.4 Pretax margin (%) (17.1) 11.7 5.3 5.7 7.1 Net profit margin (%) (19.9) 5.9 3.0 3.5 4.4 Interest cover (x) 3.2 2.6 1.9 1.9 2.1 Effective tax rate (%) 22.1 36.8 28.0 28.0 28.0 Dividend payout (%) nm 59.7 117.3 97.3 74.3 Debtors turnover (days) 73 74 65 59 59 Stock turnover (days) 3 3 2 2 2 Creditors turnover (days) 192 184 170 158 158

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 21

TELECOMMUNICATION DIGI.COM

(DIGI MK EQUITY, DSOM.KL) 11 Aug 2020

Late to the fibre party Company report HOLD

Alex Goh (Maintained) [email protected] 03-2036 2280 Rationale for report: Company update

Investment Highlights Price RM4.21 Fair Value RM4.40 52-week High/Low RM5.08/RM3.82  We retain our HOLD rating on Digi.Com with unchanged forecasts and DCF-based fair value of RM4.40/share. This is Key Changes based on a WACC of 6.3% and terminal growth rate of 2%, Fair value  which implies an FY20F EV/EBITDA of 12x — in line with its 2- EPS  year average together with a supportive dividend yield of 4%.

YE to Dec FY19 FY20F FY21F FY22F  Amid the unrelenting competition in the cellular sector and now Revenue (RM mil) 6,297.4 6,009.2 6,069.9 6,088.7 increasingly in the fibre broadband market, we view Core net profit (RM mil) 1,432.9 1,239.5 1,329.2 1,371.3 consolidation amongst the key operators as crucial to catalyse FD Core EPS (sen) 18.4 15.9 17.1 17.6 a re-rating for the sector and attract needed investments for 5G FD Core EPS growth (%) (7.0) (13.5) 7.2 3.2 Consensus Net Profit (RM mil) - 1,308.6 1,374.8 1,321.6 rollouts. As such, we have relooked at 3 probable DPS (sen) 18.2 15.9 17.1 17.6 permutations: 1) Axiata-TM re-merger; 2) Axiata-Telenor-Digi PE (x) 22.7 26.2 24.4 23.7 revisit; and 3) TM-Time dotCom (Time) merger. EV/EBITDA (x) 11.3 11.7 11.1 10.8 Div yield (%) 4.2 3.7 3.9 4.0 ROE (%) 215.0 204.3 240.2 247.7  Under scenario 2, we view tremendous synergies and avenues Net Gearing (%) 710.9 823.1 726.3 615.5 for cost optimisation (see accompanying sector update), which

should catalyse excitement for Digi. Stock and Financial Data  However, under scenario 1, Digi will be negatively affected as Shares Outstanding (million) 7,775.0 the stronger fibre-cellular operations of Axiata-TM can provide Market Cap (RM mil) 32,732.8 Book Value (RM/share) 0.08 a bundled experience that Digi will find hard to emulate. P/BV (x) 49.2 Furthermore, Digi remains a late player in fixed broadband, ROE (%) 215.0 which may constrain the group from making significant inroads Net Gearing (%) 710.9 in the retail segment.

Major Shareholders Telenor(49.0%) Meanwhile, unifi, Maxis Home Fibre and Time have been EPF(14.5%)  offering their fixed broadband services over the past 10 years. Free Float 35.0 However, only in September 2019, Digi launched its first Avg Daily Value (RM mil) 14.2 commercial home broadband service in Sabah following its pilot rollouts earlier this year in selected areas within the Klang Price performance 3mth 6mth 12mth Valley and Melaka.

Absolute (%) (6.7) (5.2) (16.4) Relative (%) (18.3) (7.3) (14.4)  Under scenario 3, we also view Digi in a losing position from a loss in bargaining leverage. The group currently has fibre collaborations with both TM and Time, which facilitated its 7.0 2,000 home broadband services to residential condominiums and 1,800 6.0 apartments. 1,600 5.0 1,400  A consolidation between TM and Time will reduce negotiations 1,200 4.0 to just a single party for Digi, which could erode its bargaining 1,000 3.0 leverage for fibre access. Being a late player in fixed 800 broadband, it may constrain the group from making significant 2.0 600 inroads in the retail segment. 400 1.0 200  In 2QFY20, Digi’s net subscribers fell by 338K QoQ to 10.6mil, 0.0 0 comprising a 309K drop from prepaid subscribers and a 29K Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 contraction from postpaid users.

DIGI MK FBMKLCI Index  Hence, unless scenario 2 materialises with Digi’s involvement, any consolidation will likely be negative for Digi. Against an increasingly competitive celco landscape, the stock currently trades at a fair FY21F EV/EBITDA of 11x – slightly below its 2- year average of 12x with decent dividend yields of 4%. Digi.Com 11 Aug 2020

EXHIBIT 1: MOBILE SUBSCRIBERS EXHIBIT 2: MOBILE SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 3: PREPAID SUBSCRIBERS EXHIBIT 4: PREPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 5: POSTPAID SUBSCRIBERS EXHIBIT 6: POSTPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 23

Digi.Com 11 Aug 2020

EXHIBIT 7: PREPAID ARPU EXHIBIT 8: PREPAID ARPU CHANGES RM/month QoQ RM/user 4 1.5 3 1.0 2 0.5 1 - 0 (0.5) (1) (1.0) (2) (3) (1.5) (4) (2.0) (5) (2.5) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 9: POSTPAID ARPU EXHIBIT 10: POSTPAID ARPU CHANGES RM/month QoQ RM/month 10 6.0

4.0 5 2.0

- 0 (2.0)

(4.0) (5) (6.0)

(10) (8.0) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 12: BLENDED ARPU CHANGES EXHIBIT 11: BLENDED ARPU

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 24

Digi.Com 11 Aug 2020

EXHIBIT 13: PB BAND CHART EXHIBIT 14: PE BAND CHART

90.00 35.00

80.00 30.00 +1δ 70.00 +1δ Avg 25.00 Avg 60.00 -1δ -1δ 50.00 20.00

40.00 15.00 30.00 10.00 20.00 5.00 10.00

0.00 0.00 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

AmInvestment Bank Bhd 25

Digi.Com 11 Aug 2020

EXHIBIT 15: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue 6,527.1 6,297.4 6,009.2 6,069.9 6,088.7 EBITDA 2,993.5 3,301.0 3,166.0 3,286.4 3,337.4 Depreciation/Amortisation (826.4) (1,217.8) (1,276.6) (1,288.2) (1,300.0) Operating income (EBIT) 2,167.1 2,083.2 1,889.4 1,998.1 2,037.3 Other income & associates 21.5 20.4 19.4 18.5 17.5 Net interest (109.2) (211.3) (233.8) (220.3) (201.8) Exceptional items - - - - - Pretax profit 2,079.4 1,892.3 1,675.0 1,796.3 1,853.1 Taxation (538.7) (459.4) (435.5) (467.0) (481.8) Minorities/pref dividends - - - - - Net profit 1,540.8 1,432.9 1,239.5 1,329.2 1,371.3 Core net profit 1,540.8 1,432.9 1,239.5 1,329.2 1,371.3

Balance Sheet (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Fixed assets 2,881.2 2,852.8 2,271.5 1,907.8 1,474.9 Intangible assets 981.7 324.9 369.1 350.6 333.1 Other long-term assets 253.4 3,114.5 2,896.5 2,693.8 2,505.2 Total non-current assets 4,116.3 6,292.3 5,537.1 4,952.2 4,313.2 Cash & equivalent 433.1 457.7 392.0 626.0 837.6 Stock 61.1 90.5 56.3 56.9 57.0 Trade debtors 1,460.7 1,220.9 1,555.5 1,571.2 1,576.1 Other current assets 134.8 88.0 83.6 87.7 92.1 Total current assets 2,089.8 1,857.2 2,087.3 2,341.8 2,562.8 Trade creditors 369.7 284.4 331.4 334.7 335.7 Short-term borrowings 181.4 688.8 723.2 759.4 797.3 Other current liabilities 2,144.1 1,784.3 1,520.5 1,488.6 1,471.4 Total current liabilities 2,695.2 2,757.5 2,575.1 2,582.7 2,604.5 Long-term borrowings 2,512.7 4,461.0 4,224.9 3,886.9 3,447.0 Other long-term liabilities 325.0 270.9 270.9 270.9 270.9 Total long-term liabilities 2,837.7 4,732.0 4,495.8 4,157.8 3,718.0 Shareholders’ funds 673.2 660.0 553.5 553.5 553.5 Minority interests - - - - - BV/share (RM) 0.09 0.08 0.07 0.07 0.07

Cash Flow (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Pretax profit 2,079.4 1,892.3 1,675.0 1,796.3 1,853.1 Depreciation/Amortisation 826.4 1,217.8 1,276.6 1,288.2 1,300.0 Net change in working capital (79.9) 73.6 (141.5) (15.6) (12.2) Others (339.3) (245.3) (160.9) (203.9) (235.2) Cash flow from operations 2,486.7 2,938.4 2,649.3 2,865.0 2,905.7 Capital expenditure (783.3) (692.7) (661.0) (667.7) (669.8) Net investments & sale of fixed assets - - - - - Others - - - - - Cash flow from investing (783.3) (692.7) (661.0) (667.7) (669.8) Debt raised/(repaid) - - - - - Equity raised/(repaid) - - - - - Dividends paid (1,523.9) (1,415.1) (1,239.5) (1,329.2) (1,371.3) Others - - - - - Cash flow from financing (1,523.9) (1,415.1) (1,239.5) (1,329.2) (1,371.3) Net cash flow 179.5 830.6 748.8 868.1 864.7 Net cash/(debt) b/f 179.5 830.6 748.8 868.1 864.7 Net cash/(debt) c/f 359.0 1,661.3 1,497.6 1,736.1 1,729.4

Key Ratios (YE31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue growth (%) 2.9 (3.5) (4.6) 1.0 0.3 EBITDA growth (%) 4.0 10.3 (4.1) 3.8 1.6 Pretax margin (%) 31.9 30.0 27.9 29.6 30.4 Net profit margin (%) 23.6 22.8 20.6 21.9 22.5 Interest cover (x) 19.8 9.9 8.1 9.1 10.1 Effective tax rate (%) 25.9 24.3 26.0 26.0 26.0 Dividend payout (%) 98.9 98.8 100.0 100.0 100.0 Debtors turnover (days) 75 78 84 94 94 Stock turnover (days) 3 4 4 3 3 Creditors turnover (days) 20 19 19 20 20

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 26

TELECOMMUNICATION MAXIS

(MAXIS MK EQUITY, MSXC.KL) 11 Aug 2020

Leading convergent position Company report HOLD

Alex Goh (Maintained) [email protected] 03-2036 2280 Rationale for report: Company update

Investment Highlights Price RM5.18 Fair Value RM5.50 52-week High/Low RM5.70/RM4.59  We reiterate our HOLD call on Maxis with an unchanged DCF- derived fair value of RM5.50/share, based on a WACC discount Key Changes rate of 6.3% and terminal growth rate assumption of 2%, Fair value  implying an FY20F EV/EBITDA of 13x, on par with its 3-year EPS  average.

YE to Dec FY19 FY20F FY21F FY22F  Amid the unrelenting competition in the cellular sector and now increasingly in the fibre broadband market, we view 9,313.0 9,610.0 9,865.0 10,084.8 Revenue (RM mil) consolidation amongst the key operators as crucial to catalyse Core net profit (RM mil) 1,500.0 1,472.9 1,561.3 1,619.4 FD Core EPS (sen) 19.2 18.8 20.0 20.7 a re-rating for the sector and attract needed investments for 5G FD Core EPS growth (%) (15.1) (1.8) 6.0 3.7 rollouts. Consensus Net Profit (RM mil) - 1,451.0 1,562.5 1,667.0 DPS (sen) 20.0 19.0 20.0 20.0  However, we view Maxis, which currently has the leading market PE (x) 27.0 27.5 25.9 25.0 and revenue share, as an unlikely candidate for M&A. Over the EV/EBITDA (x) 13.3 13.2 12.3 11.6 past years, Maxis has successfully leveraged its convergence Div yield (%) 3.6 3.5 3.6 3.6 strategy with fibre offerings, premium cellular connectivity and ROE (%) 21.4 20.9 22.1 22.9 Net Gearing (%) 122.6 131.7 129.6 123.0 strong customer service support to penetrate the fixed broadband market while leasing the High Speed Broadband

Stock and Financial Data (HSBB) network from TM.

Shares Outstanding (million) 7,816.6  If TM were to re-merge with Axiata, the new entity may be able to Market Cap (RM mil) 40,490.0 provide greater competition to Maxis’ convergence strategy of Book Value (RM/share) 0.90 bundling fibre and cellular plans at attractive propositions. P/BV (x) 5.7 ROE (%) 21.4  However, given Maxis’ premier cellular network connectivity and Net Gearing (%) 122.6 customer service quality, synergies and coordination from a TM- Axiata merger may only materialise in the longer term, allowing Binariang GSM (62.4%) Major Shareholders a much wider head start for Maxis to cement its leading position. Skim ASB (8.1%) EPF (11.6%) Free Float 35.0  While Maxis has not partnered with Time to offer fixed Avg Daily Value (RM mil) 12.2 broadband to the retail segment, we understand that the group has backhaul arrangements with multiple carriers which may Price performance 3mth 6mth 12mth include Time.

Absolute (%) (1.7) (5.0) (4.3)  Hence, if TM were to successfully merge with Time, Maxis should Relative (%) (13.9) (7.1) (2.0) be able to benefit by leveraging on Time’s niche advantage in

high rise and mass dwelling units. 8.0 2,000

7.0 1,800  We believe that given Maxis’ substantive lead in penetrating the 1,600 enterprise and retail markets with convergence strategies 6.0 1,400 coupled with premier wireless back-up always-on services over 5.0 1,200 a year ago, the group is well positioned to offer competitive 4.0 1,000 packages to a wider growth of potential customers. 800 3.0 Additionally, Maxis can also tap into Time’s fibre network for its 600  2.0 5G backhaul services while leveraging on its existing lease 400 arrangement with TM. 1.0 200 0.0 0 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19  Maxis is the leading celco as its subscriber market share of 37.2% has finally overtaken Digi's 36.4% while Celcom remained a distant third at 26.4%. The group’s postpaid subscriber focus MAXIS MK FBMKLCI Index and convergence strategy with its fibre broadband services appear to be working out better than Digi and Celcom's.

 The stock’s FY21F EV/EBITDA of 13x is currently on parity with its 3-year average, while providing a fair dividend yield of 4%.

Maxis 11 Aug 2020

EXHIBIT 1: MOBILE SUBSCRIBERS EXHIBIT 2: MOBILE SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 3: PREPAID SUBSCRIBERS EXHIBIT 4: PREPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 5: POSTPAID SUBSCRIBERS EXHIBIT 6: POSTPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 28

Maxis 11 Aug 2020

EXHIBIT 7: PREPAID ARPU EXHIBIT 8: PREPAID ARPU CHANGES RM/month QoQ RM/user 4 1.5 3 1.0 2 0.5 1 - 0 (0.5) (1) (1.0) (2) (3) (1.5) (4) (2.0) (5) (2.5) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 9: POSTPAID ARPU EXHIBIT 10: POSTPAID ARPU CHANGES RM/month QoQ RM/month 10 6.0

4.0 5 2.0

- 0 (2.0)

(4.0) (5) (6.0)

(10) (8.0) Maxis Celcom Digi Average

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 12: BLENDED ARPU CHANGES EXHIBIT 11: BLENDED ARPU

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 29

Maxis 11 Aug 2020

EXHIBIT 13: PB BAND CHART EXHIBIT 14: PE BAND CHART

12.00 35.00

30.00 10.00 +1δ

+1δ 25.00 Avg 8.00 -1δ Avg 20.00 6.00 -1δ 15.00

4.00 10.00

2.00 5.00

AmInvestment Bank Bhd 30

Maxis 11 Aug 2020

EXHIBIT 1: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue 9,192.0 9,313.0 9,610.0 9,865.0 10,084.8 EBITDA 3,781.0 3,700.0 3,772.2 4,022.7 4,236.3 Depreciation/Amortisation (1,068.0) (1,265.0) (1,417.8) (1,549.2) (1,679.3) Operating income (EBIT) 2,713.0 2,435.0 2,354.4 2,473.5 2,557.0 Other income & associates - - - - - Net interest (344.0) (399.0) (380.2) (380.8) (386.4) Exceptional items - - - - - Pretax profit 2,369.0 2,036.0 1,974.2 2,092.7 2,170.6 Taxation (589.0) (517.0) (501.3) (531.4) (551.2) Minorities/pref dividends - - - - - Net profit 1,780.0 1,519.0 1,472.9 1,561.3 1,619.4 Core net profit 1,767.0 1,500.0 1,472.9 1,561.3 1,619.4

Balance Sheet (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Fixed assets 5,190.0 4,922.0 5,470.5 5,501.0 5,333.5 Intangible assets 10,926.0 11,310.0 11,310.0 11,310.0 11,310.0 Other long-term assets 1,023.0 2,219.0 2,135.9 2,058.6 1,986.8 Total non-current assets 17,139.0 18,451.0 18,916.4 18,869.7 18,630.3 Cash & equivalent 560.0 582.0 731.4 727.9 964.0 Stock 16.0 3.0 20.5 20.5 20.5 Trade debtors 2,056.0 2,390.0 1,658.2 1,659.5 1,661.3 Other current assets 34.0 11.0 1.0 1.0 1.0 Total current assets 2,666.0 2,986.0 2,411.1 2,408.9 2,646.8 Trade creditors 4,020.0 4,323.0 3,438.9 3,530.2 3,608.8 Short-term borrowings 206.0 1,079.0 1,053.0 1,053.0 1,053.0 Other current liabilities 315.0 255.0 253.8 263.7 271.2 Total current liabilities 4,541.0 5,657.0 4,745.7 4,846.9 4,933.1 Long-term borrowings 7,607.0 8,172.0 8,975.3 8,816.2 8,661.4 Other long-term liabilities 508.0 538.0 548.8 559.7 570.9 Total long-term liabilities 8,115.0 8,710.0 9,524.1 9,376.0 9,232.3 Shareholders’ funds 7,149.0 7,070.0 7,057.7 7,055.7 7,111.8 Minority interests - - - - - BV/share (RM) 0.91 0.90 0.90 0.90 0.91

Cash Flow (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Pretax profit 2,369.0 2,036.0 1,974.2 2,092.7 2,170.6 Depreciation/Amortisation 1,068.0 1,265.0 1,417.8 1,549.2 1,679.3 Net change in working capital (238.0) (298.0) 724.3 (1.3) (1.8) Others 296.0 42.0 (1,098.1) (105.0) (128.5) Cash flow from operations 3,495.0 3,045.0 3,018.2 3,535.6 3,719.6 Capital expenditure (1,286.9) (1,397.0) (1,441.5) (1,479.7) (1,411.9) Net investments & sale of fixed assets - - - - - Others - - - - - Cash flow from investing (1,286.9) (1,397.0) (1,441.5) (1,479.7) (1,411.9) Debt raised/(repaid) (1.0) 455.0 789.4 (173.7) (170.2) Equity raised/(repaid) - - - - - Dividends paid (1,563.3) (1,563.3) (1,485.2) (1,563.3) (1,563.3) Others (685.8) (517.7) (731.5) (322.4) (338.1) Cash flow from financing (2,250.1) (1,626.1) (1,427.3) (2,059.4) (2,071.6) Net cash flow (42.0) 22.0 149.4 (3.5) 236.1 Net cash/(debt) b/f 2,080.2 2,038.2 2,060.2 2,209.6 2,206.1 Net cash/(debt) c/f 2,038.2 2,060.2 2,209.6 2,206.1 2,442.2

Key Ratios (YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue growth (%) 5.7 1.3 3.2 2.7 2.2 EBITDA growth (%) (12.3) (2.1) 2.0 6.6 5.3 Pretax margin (%) 25.8 21.9 20.5 21.2 21.5 Net profit margin (%) 19.4 16.3 15.3 15.8 16.1 Interest cover (x) 7.9 6.1 6.2 6.5 6.6 Effective tax rate (%) 24.9 25.4 25.4 25.4 25.4 Dividend payout (%) 87.8 102.9 100.8 100.1 96.5 Debtors turnover (days) 77 87 77 61 60 Stock turnover (days) - - - 1 1 Creditors turnover (days) 146 163 147 129 129

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 31

TELECOMMUNICATION TELEKOM MALAYSIA

(T MK EQUITY, TLMM.KL) 11 Aug 2020

Prime candidate for consolidation Company report HOLD

Alex Goh (Maintained) [email protected] 03-2036 2280 Rationale for report: Company update

Investment Highlights Price RM3.77 Fair Value RM4.15 52-week High/Low RM4.58/RM3.09  We maintain our HOLD call on Telekom Malaysia (TM) with unchanged forecasts and DCF-based fair value of RM4.15/share Key Changes based on a WACC of 7.4% and terminal growth rate of 2%. This Fair value  implies an FY20F EV/EBITDA of 5x, at parity to its 2-year average. EPS   Amid the unrelenting competition in the cellular sector and now YE to Dec FY19 FY20F FY21F FY22F increasingly in the fibre broadband market, we view consolidation

Revenue (RM mil) 11,434.2 11,345.2 11,419.1 11,547.2 amongst the key operators as crucial to catalyse a re-rating for the Core net profit (RM mil) 1,000.8 833.1 862.6 904.4 sector and attract needed investments for 5G rollouts. FD Core EPS (sen) 26.6 22.2 23.0 24.1 FD Core EPS growth (%) 58.3 (16.8) 3.5 4.8  As TM still aspires to be the convergence champion by offering Consensus Net Profit (RM mil) - 828.4 866.0 887.2 quad-play digital and smart services on a nationwide scale, we DPS (sen) 10.0 10.0 10.0 10.0 believe that the group would seriously consider re-establishing its PE (x) 14.6 17.5 16.9 16.1 EV/EBITDA (x) 5.4 5.4 4.9 4.4 fibre monopoly in the metropolitan areas of Klang Valley, Penang Div yield (%) 2.5 2.5 2.5 2.5 and Johor, which were successfully penetrated by Time dotCom ROE (%) 8.2 10.2 10.1 10.1 (Time) over the past 10 years. Net Gearing (%) 88.4 73.9 57.7 39.0

 While securing additional wholesale fibre capacity which will be Stock and Financial Data needed for 5G backhaul services, TM could also secure synergies via cost-efficiency gains and improved investment/credit rating Shares Outstanding (million) 3,758.0 Market Cap (RM mil) 14,167.7 profile. The reduction in operational costs could stem from Book Value (RM/share) 2.13 redundancies in Time’s head office in Shah Alam, backhaul and P/BV (x) 1.8 service stations, as well as lower headcount. Additionally, TM’s ROE (%) 8.2 footprint will be expanded in the provision of data centre services, Net Gearing (%) 88.4 which are already in the group’s portfolio. Major Shareholders Khazanah (26.2%) We have evaluated 3 potential scenarios for TM, involving 1) TM- EPF (17.5%)  ASB (15.7%) Axiata, 2) TM-Time, and 3) TM-Axiata-Time combinations, given Free Float 30.0 that Khazanah Nasional holds a 38% in Axiata and 20% in Time. Avg Daily Value (RM mil) 21.2 Any of these combinations will re-rate TM given the low-hanging

Price performance 3mth 6mth 12mth fruits of cost optimisation and right sizing strategies under a potential merger. Absolute (%) (8.7) 0.5 (5.1) Relative (%) (20.0) (1.7) (2.9)  Under scenario 1, assuming a 10% cost reduction would mean substantial annual savings of RM2.2bil, and together with a

8.0 2,000 targeted FY21F EV/EBITDA of 5x, the combined market capitalisation could rise by 52%. Valuations can be further 7.0 1,800 1,600 expanded later if the merged operations successfully revamp fibre 6.0 1,400 plus cellular packages under new bundled offerings. 5.0 1,200  Under scenario 2, if the merged entity is able to reduce Time's 4.0 1,000 operational costs by 20% while re-establishing TM’s fibre 3.0 800 600 monopoly in the Klang Valley, Penang and Johor, we estimate that 2.0 400 the merged entity's DCF/share could reach RM5.00, based on a 1.0 200 WACC of 7.4% and terminal growth rate of 2% post-FY25F, 0.0 0 implying a potential upside of 28%. Aug-15 Aug-16 Aug-17 Aug-18 Aug-19  Under scenario 3, the combined cost savings from the 3 telco operators could translate to RM2.3bil per annum, potentially T MK FBMKLCI Index driving TM’s fair value even further by 80%.  However, until fibre consolidation actually materialises, the stock currently trades at a fair FY21F EV/EBITDA of 5x with a decent dividend yield of 3%.

Telekom Malaysia 11 Aug 2020

EXHIBIT 1: TM’S CAPEX

Source: TM’s IR slides

EXHIBIT 2: PB BAND CHART EXHIBIT 3: PE BAND CHART

4.00 180.00

3.50 160.00

+1δ 140.00 3.00 120.00 2.50 Avg 100.00 2.00 80.00 -1δ +1δ 1.50 60.00 1.00 40.00 Avg

0.50 20.00 -1δ 0.00 0.00 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

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Telekom Malaysia 11 Aug 2020

EXHIBIT 4: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue 11,819.3 11,434.2 11,345.2 11,419.1 11,547.2 EBITDA 3,193.4 3,999.9 3,861.5 4,000.2 4,169.4 Depreciation/Amortisation (2,370.0) (2,331.0) (2,423.2) (2,505.1) (2,647.8) Operating income (EBIT) 823.4 1,668.9 1,438.3 1,495.1 1,521.6 Other income & associates 21.0 15.0 15.8 16.5 17.4 Net interest (347.8) (390.7) (294.0) (312.2) (281.6) Exceptional items (479.2) (368.1) - - - Pretax profit 17.4 925.1 1,160.1 1,199.4 1,257.3 Taxation (277.9) (367.7) (406.0) (419.8) (440.1) Minorities/pref dividends 413.7 75.3 79.1 83.0 87.2 Net profit 153.2 632.7 833.1 862.6 904.4 Core net profit 632.4 1,000.8 833.1 862.6 904.4

Balance Sheet (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Fixed assets 15,263.3 15,301.4 14,577.3 13,649.4 12,418.2 Intangible assets 490.0 490.0 490.0 490.0 490.0 Other long-term assets 1,548.4 1,581.6 1,615.6 1,650.3 1,685.9 Total non-current assets 17,301.7 17,373.0 16,682.8 15,789.8 14,594.1 Cash & equivalent 2,826.3 706.9 1,611.4 2,748.4 4,232.7 Stock 134.6 250.6 248.7 250.3 253.1 Trade debtors 2,405.2 3,978.5 3,947.5 3,973.2 4,017.8 Other current assets 1,036.7 1,057.4 1,078.6 1,100.2 1,122.2 Total current assets 6,402.8 5,993.5 6,886.2 8,072.1 9,625.8 Trade creditors 3,610.3 3,759.2 3,729.9 3,754.2 3,796.3 Short-term borrowings 234.1 245.8 258.1 271.0 284.6 Other current liabilities 1,353.7 1,353.1 1,379.8 1,407.1 1,434.8 Total current liabilities 5,198.1 5,358.1 5,367.9 5,432.3 5,515.7 Long-term borrowings 8,337.2 7,535.0 7,535.0 7,535.0 7,535.0 Other long-term liabilities 3,153.7 3,040.9 2,943.5 2,860.2 2,789.4 Total long-term liabilities 11,490.9 10,575.9 10,478.5 10,395.2 10,324.4 Shareholders’ funds 7,525.2 7,998.1 8,367.4 8,762.2 9,194.7 Minority interests (509.7) (565.7) (644.8) (727.8) (815.0) BV/share (RM) 2.00 2.13 2.23 2.33 2.45

Cash Flow (RMmil, YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Pretax profit 17.4 925.1 1,160.1 1,199.4 1,257.3 Depreciation/Amortisation 2,370.0 2,331.0 2,423.2 2,505.1 2,647.8 Net change in working capital (121.5) 15.8 3.7 (3.0) (5.3) Others 1,042.9 (2,314.8) (17.7) (44.3) (95.1) Cash flow from operations 3,308.8 957.1 3,569.2 3,657.2 3,804.8 Capital expenditure (2,363.9) (2,058.2) (2,382.5) (2,283.8) (2,078.5) Net investments & sale of fixed assets - - - - - Others (153.3) 32.2 (45.5) (49.8) (6.6) Cash flow from investing (2,517.2) (2,025.9) (2,428.0) (2,333.6) (2,085.1) Debt raised/(repaid) 421.1 (790.5) 12.3 12.9 13.6 Equity raised/(repaid) - - - - - Dividends paid (75.2) (375.8) (375.8) (375.8) (375.8) Others (705.7) (650.7) (445.5) (431.6) (419.0) Cash flow from financing (359.8) (1,817.0) (809.0) (794.5) (781.2) Net cash flow 431.9 (2,885.8) 332.2 529.1 938.5 Net cash/(debt) b/f 1,740.8 2,841.3 722.7 1,628.0 2,765.8 Net cash/(debt) c/f 2,172.7 (44.5) 1,054.9 2,157.0 3,704.3

Key Ratios (YE 31 Dec) FY18 FY19 FY20F FY21F FY22F

Revenue growth (%) (2.2) (3.3) (0.8) 0.7 1.1 EBITDA growth (%) (13.5) 25.3 (3.5) 3.6 4.2 Pretax margin (%) 0.1 8.1 10.2 10.5 10.9 Net profit margin (%) 1.3 5.5 7.3 7.6 7.8 Interest cover (x) 2.4 4.3 4.9 4.8 5.4 Effective tax rate (%) 1,597.1 39.7 35.0 35.0 35.0 Dividend payout (%) 49.1 59.4 45.1 43.6 41.6 Debtors turnover (days) 94 102 127 127 126 Stock turnover (days) 6 6 8 8 8 Creditors turnover (days) 116 118 120 120 119

Source: Company, AmInvestment Bank Bhd estimates

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Telekom Malaysia 11 Aug 2020

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