Malaysian telcos may start emerging from oversold position from early July: CGS-CIMB

AFTER falling by an average of 17 per cent in the year to date (YTD), share prices of Malaysia’s telcos may see rerating opportunities from early July, when more clarity is expected to emerge on the country’s 5G plans.

This is according to CGS-CIMB, which raised its sector rating to “overweight” from “underweight” in a report on Monday (Jul 4).

The research house has also lifted its rating on Maxis to “add” from “hold” despite lowering its price target by 8 per cent to RM3.60 to reflect a higher risk-free rate. The upgrade comes as CGS-CIMB thinks Maxis’s earnings risk from 5G wholesale fees has been priced in, given its 28 per cent share price decline YTD.

Telekom Malaysia (TM) however remains the research house’s top “add” pick within the sector, due to its bigger upside potential and position to benefit from the country’s structural demand for fibre, data centres and cloud services.

CGS-CIMB believes both Maxis and TM offer “decent” yields above the 10-year Malaysian government bond yield – even in the base-case scenario where their earnings take a hit from signing 5G wholesale agreements based on the current offer, with no equity stakes in Malaysia’s single wholesale 5G network operator Digital Nasional Berhad (DNB).

“Even if telcos were to sign-up on DNB’s current wholesale terms, it would still help to provide certainty and dispel fears over potentially even worse-case scenarios, while more favourable outcomes could lead to more significant upsides, in our view,” said CGS-CIMB analysts in their report.

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“In our analysis, Maxis’ and TM’s discounted cash flow-based fair value in 3 possible scenarios are all higher than their current share prices by 8 to 32 per cent and 27 to 28 per cent, respectively,” they added.

Other scenarios assessed by the analysts include the assumption that telcos take up 12 per cent stakes each in DNB with wholesale fees charged based on actual traffic - and a newly elected government reviewing DNB’s single wholesale network model, which could possibly result in the case of Malaysia reverting to telcos rolling out their own 5G networks.