We came away from a meeting with TM feeling encouraged of its 5G thrust. Whilst we do not expect Unifi Mobile to be an earnings driver, we believe it enhances TM’s convergence proposition and customer retention. We also believe its 5G services have significantly improved over its previous 4G offerings due to better network quality. We maintain our forecasts, TP of RM6.76 and OUTPERFORM call.

4G was a washout. Following its previous muted attempt to penetrate the 4G mobile space, TM believes it has a better chance moving forward with 5G. This is given improved network quality and effective product marketing. Recall that back in 2014, TM ventured into the mobile space via the acquisition of Packet One Networks (Malaysia) Sdn Bhd (P1). This enabled TM to offer converged services via P1’s 4G LTE network and mobile spectrum (20MHz block within 2.6GHz band). TM’s mobile service was launched as webe in Sept 2016 and subsequently rebranded as Unifi Mobile.

Navigated 4G with handicaps. Unfortunately, Unifi Mobile had limited traction in attracting new 4G subscribers. TM attributes this to: (i) insufficient spectrum holdings that led to weak network quality, and (ii) lack of experience in marketing mobile services. To recap, TM’s competitors (i.e. Celcom, Digi and MAXIS) have additional 3G and 4G spectrums that translate to better network coverage and internet speed. This comprises spectrum in the 900MHz, 1.8GHz, 2.1GHz and 2.6GHz bands. In contrast, TM was constrained by only having the 850MHz and 2.6GHz spectrums for transmission of 4G LTE. Therefore, in 2019, as a counter measure, TM entered into a 3-year network sharing agreement with Celcom for 4G domestic roaming and MOCN (Multi-Operator Core Network) services. This was on top of the existing 2G and 3G roaming agreements. Unfortunately, in spite of this, Unifi Mobile’s network quality remained inadequate, according to TM.

Refreshed and stronger for 5G. Nevertheless, fast forward to the 5G era, Unifi Mobile will no longer be handicapped by deficient spectrum resource. This is because all mobile players will likely continue to procure wholesale 5G capacity from a single universal provider (i.e. Digital Nasional Berhad or DNB) over the next few years. Thereafter, following the emergence of a new second 5G network, TM will also have the option to choose between 2 wholesale providers. As such, this implies a relatively level 5G landscape that enables TM to compete effectively.

Arming itself to be a formidable player. On top of that, in Jun 2023, TM switched to MAXIS (from Celcom) to supply 4G MOCN, 4G and 2G Domestic Roaming services. Arising from this, Unifi Mobile now has 95% population coverage for 4G services. According to TM, the change in infrastructure supplier led to a significant improvement in its network quality. Furthermore, Unifi Mobile’s renewed efforts to aggressively pursue market share is boosted by the appointment of its new CEO, Jasmine Lee in Oct 2022. During her stint as Chief Digital Officer and Chief Marketing Officer at U Mobile, its subscriber base expanded 7-fold from 1m in 2013 to 7m in 2021.

Now convergence finally means something. Whilst we do not expect Unifi Mobile to be a tangible earnings driver, we believe it enhances TM’s convergence strategy. Hence, this will provide a boost to Unifi’s ARPU, which is one of TM’s key products. Whilst TM’s previous 4G services were far from compelling (due to the reasons highlighted earlier), we believe the converse is true for its 5G products. Evidently, based on OpenSignal’s Sept 2023 ranking of true wireless experience in Malaysia (excluding MAXIS), Unifi Mobile won awards for Consistent Quality and Live Video experience. Additionally, TM managed to secure 5 other joint wins in the video, voice app, 5G live video, 5G download speed and 5G coverage experiences. Hence, this translates to a tie with Digi in terms of the highest total number of wins in the various categories.

Not in direct competition with the big boys. Moreover, Unifi Mobile’s current postpaid plans are reasonably priced so that it does not compete with its larger established competitors. Monthly fees for its postpaid packages range between RM39-RM99, which mirrors UMobile’s pricing. In comparison, CDB, MAXIS’ and Digi’s postpaid plans range higher from RM60-RM139. Therefore, we anticipate relatively encouraging response for Unifi Mobile’s new UNI5G products. Furthermore, for the UNI5G Postpaid plans (except for UNI5G Postpaid 39), customers enjoy a monthly rebate of RM10 (limited time promo) on their Unifi Home fixed broadband bill. Hence, this boosts TM’s convergence proposition, cross selling opportunities, and retention of its fixed broadband customer base.

Additional 5G monetization from other avenues. TM concurs that future 5G access capacity payment of RM288m per annum to DNB is a financial drag to small 5G players like Unifi Mobile. This is given lower 5G monetization opportunities from a smallish retail subscriber base. Nevertheless, on the bright side, TM may monetize its 5G offerings for enterprise and public sector customers. For instance, TM One recently implemented Petronas’ private 5G network at Sg. Udang Regassification Terminal. Additionally, TM had also deployed 5G automated remote operation control and monitoring solutions at one of Petronas’ offshore platforms. Moving forward, Petronas aims to have over twenty 5G-enabled offshore assets by 2024.On the back of this, we believe that TM is able to leverage on 5G and big data trends over the longer term. This is backed by its track record with government-linked companies and agencies that have the financial muscle to invest in 5G.

Moreover, TM’s 5G access payments are also partially offset by its 10-year RM2b fiber leasing service contract with DNB. In FY23, TM recognized circa RM100m in leasing fees from this contract that will recur over the next 8 years. To recap, under this agreement, DNB leases TM’s fibre cable network to connect its 5G mobile sites and nodes. Moving forward, we do not discount the possibility that TM may secure a similar contract for the upcoming second 5G network.

Remain sanguine as structural data trends remain intact. We maintain our forecasts, TP of RM6.76 (based on 5.5x FY24F EV/EBITDA) and OUTPERFORM recommendation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like TM on account of: (i) it being leveraged towards secular data growth on the back of current trends such as digital transformation, proliferation of internet of things (IoT), AI integration etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, and (iii) sustained traction in its cost optimization initiatives.

Risks to our call include: (i) higher-than-expected erosion in wholesale revenues from new Reference Access Offer prices, (ii) pricing pressures at the retail segment arising from policy-led directives, and (iii) irrational competition in the retail fiber broadband space.

Source: Kenanga Research - 10 Jan 2024