Outlook on the Malaysian telco sector remains challenging says Maybank IB, the house notes that the sector is plagued by extended uncertainty in 5G (second network) and elevated competition in fixed broadband. Nevertheless, it also noted that risks are somewhat priced in given mobile telcos' share price corrections in 2024. The house maintains its NEUTRAL stance on the sector, with preferred pick being CelcomDigi (realisation of merger synergies). Maybank IB also has a BUY ratings on Axiata (earnings recovery and balance sheet repair) and TM (cost optimization with data centre exposure).

5G overhang to remain, but it is priced in
Maybank IB believes mobile operators could continue to be plagued by regulatory uncertainty and 5G capex risk in 2025. UMobile is unlikely to deploy the second 5G network by itself, and could potentially collaborate with either CelcomDigi or Maxis (thus 5G capex concerns could resurface for these two). The house is also unsure if the present DNB access fees would be revised as part of the process of setting up the second 5G network. Nevertheless, given the share price correction of mobile telcos in recent years, some of the 5G capex risk could have been priced in as opined by the analysts at Maybank.

Elevated fixed broadband competition
Maybank IB also expects competitive intensity in fixed broadband to remain elevated in 2025 as mobile players continue to use fixed broadband as a lever for subscriber retention. Both TM and TDC have thus far held their ground with regards to subscriber acquisitions, but the overall competitive situation remains fluid. The house estimates every MYR10/month ARPU erosion could lower our TM/TDC FY25F net profit forecasts by 19%/9% respectively. Separately, both fixed-line incumbents continue to have exposure to the data centre theme, mainly through ownership (connectivity contribution remains insignificant per checks for now). Successful delivery of the new data centre venture is a potential rerating catalyst for TM.

CelcomDigi to drive FY25 sectorial earnings growth
For the telcos sector, Maybank IB projects core net profit growth to surge from 5% in FY24F to 26% in FY25F respectively. Driving the strong FY25F sectorial net profit growth is CelcomDigi, whose net profit is projected to step up by 50% in FY25F as merger synergies manifest more meaningfully (recall initial synergy guidance of c.MYR8b NPV). Note that CelcomDigi is also
represented through Axiata's associate income line, thus its contribution to sectorial earnings is amplified. CelomDigi (CDB MK, BUY, CP: MYR3.65, TP: MYR4.50) is our top pick.