Telcos’ performance in several sustainability issues, if they are positioned well, may create new growth opportunities

by ASILA JALIL / Pic by BLOOMBERG

MALAYSIAN telecommunications companies (telcos) act as an enabler of better environmental, social and governance (ESG) practices for other sectors in the country due to the lack of serious sustainability issues or risks tied to their operations.

CGS-CIMB Securities Sdn Bhd analysts Foong Chong Chen and Sherman Lam Hsien Jin noted all four listed telcos, namely DiGi.Com Bhd, Telekom Malaysia Bhd (TM), Maxis Bhd and Axiata Group Bhd, have final scores above the midpoint, indicating the sector as a whole performed well from an ESG perspective.

“The provision of increasingly better or more innovative information and communication technology solutions reduces the need to travel (lower carbon emissions), and enables greater digitisation (reducing paper waste) and automation (greater efficiencies, power savings).

“According to the GSM Association, a global industry organisation, the level of avoided emissions enabled by communications technologies was 10 times greater than from the network themselves in 2018,” the analysts stated in a report recently.

Telcos’ performance in several sustainability issues may influence longer-term market outcomes, pose risk of future disruption or if they are positioned well, they may create new growth opportunities.

Foong and Lam highlighted key material matters for telcos, namely reliability and affordability, network quality of service (QoS), data privacy and security, human capital, digital and financial inclusion, corporate governance and environmental impact.

Based on the highlighted key material issues, CGS-CIMB selected Digi as its top-ranked ESG telco, followed by TM, Axiata and Maxis.

“Our analysis leads us to believe the difference is not overly substantial between telcos and some are still in the relatively early stages of their ESG journey with plans in place that could see improvements to their future score.”

Digi’s network QoS had progressively improved given its consistent network investments and rollout execution, aided by the reallocation of the 900/1800 megahertz spectrum in mid-1207, the analysts stated.

The brokerage maintained its ‘Neutral’ call on the telecom sector as it is more optimistic on the revenue growth for the fixed line business due to structural demand and relatively more benign competition.

Its top Malaysian telco pick is TM with an ‘Add’ call with a target price (TP) of RM7. CGS-CIMB expects the telco’s core earnings per share (EPS) to be 18.1%, 17.3% and 18.6% year-onyear (YoY) in the financial year 2021 (FY21), FY22 and FY23 respectively, on Internet, ICT and data services revenue growth.

The analysts noted that TM leads in data privacy and security as it is expected to be least at risk of reputational damage from data breaches and is best placed to capitalise on the future growth in demand for cybersecurity services.

CGS-CIMB has a ‘Hold’ recommendation on Maxis with a TP of RM4.80 and forecast its FY21 core EPS to rise 7.2% YoY on bad debt normalisation before growing further by 13.9% and 5.4% in FY22 and FY23 respectively, led by mobile revenue recovery.

For the Big Three mobile network operators (MNOs) which include Maxis, Digi and Celcom, Foong and Lam expected their 4G coverage to be reasonably extensive at 92%-93% as of end of the first quarter of 2021 (1Q21), while average 4G download speed moderate at 12.7 megabytes per second between December 2020 and February 2021, which is slower than speeds in Singapore but on par with Thailand and Indonesia.

“As we transition to the new 5G landscape, we believe MNOs’ business models will likely evolve from the existing ‘high-capex (capital expenditure), network differentiation’ to potentially one that is ‘asset-light’ and where differentiation may need to come from other areas (eg customer service/support, bundling of services such as content/games/home automation) or diversification beyond the current mobile connectivity services to providing 5G solutions for enterprise customers.

“While the lower future capex requirements is a positive, the open and equal access to 5G network may result in a much more competitive market,” said the brokerage.

It added that once the 5G network is rolled out comprehensively, which is expected to be in five years time, smaller mobile operators such as U Mobile, Unifi Mobile and YES, as well as mobile virtual network operators may have the ability to offer mobile services of the same quality and coverage as the Big Three.