Telco Sector - Interconnect rates revised, HSBB stays unregulated NEUTRAL

- The MCMC has decided that from 2013, fixed termination rates and mobile termination rates will be cut by 6% and 7.4% respectively. This translates into absolute reduction of 0.3sen-0.4sen per minute. New termination rate will be 4.7sen for fixed and 4.63sen for mobile. However, there will be further reduction in termination rates by end 2015.

- Currently, both fixed and mobile termination rates are fixed at 5sen/minute - last review was in July 2010 when mobile and fixed termination rates were slashed by 40% and 18% respectively. 

- Telekom is a net beneficiary of the reduction in termination rates given that: (1) Fixed termination is lowered less than mobile termination; (2) As TM only controls circa 11% of Malaysian telco subs base, the bulk of its traffic are outgoing (>60%) to mobile networks.

- This means that TM’s termination cost reduction will more than offset the revenue reduction from lower fixed termination rates under the review. We estimate a c. 2% impact to TM’s bottomline from the move. 

- Our checks with Digi and Celcom suggests that incoming and outgoing traffic is quite evenly spread, though Celcom claims that out of its outgoing traffic, 70% are on-net calls. As such, the impact from the revised termination rates is minimal for Digi and could be a slight positive for Celcom (<1% on our estimates).

- Maxis (HOLD, FV: RM6.55/share) could be negatively impacted (albeit only slightly)  by the review given its largest share of subs share at c. 33% - we estimate that it is a net receiver of incoming calls. As such, the lower termination rates will impact Maxis’ interconnect revenue more than the reduction in outgoing cost. However, impact is expected to be small (c. 1%). 

- Meanwhile, the MCMC has decided that HSBB access price will not be regulated in order to promote competition, particularly in the early stage of HSBB rollout. While this had been one of the risks we highlighted in our TM (HOLD, FV: RM5.60/share) downgrade back in early November, slower HSBB network rollout, ballooning base of expiring contracts, intensifying competition from re-sellers and increasing maintenance cost from expiring HSBB network equipment maintenance contracts suggests that the strong earnings growth cycle seen over the past 2 years driven by HSBB could be peaking. 

- Axiata (BUY, FV: RM7.00/share) remains our top sector pick for: (1) Potential M&As and divestments in the region; (2) Dividend surprise.   

Source: AmeSecurities