Investment Highlights

• Lower prices but still no level playing field. The Malaysian Communications and Multimedia Commission (MCMC) announced that 4 telecommunications (telco) companies have reduced their fixed broadband prices to below RM100/month, with some packages increasing speeds. Axiata’s wholly-owned Celcom has reduced its 40Mbps package by 56% from RM180/month to RM80/month which is currently only available in Sabah, while Time dotCom’s 100Mbps package has been reduced by 34% from RM149/month to RM99/month, which mainly targets mass dwelling units in the Klang Valley, Penang and Johor segments.
  Earlier, TM had already announced plans to reduce its 30Mbps nationwide package by 43% from RM139/month to RM79/month while Maxis has offered its 30Mbps plan at 36% lower from RM139/month to RM89/month on 13 September this year. Maxis has already been offering its 100Mbps plan at RM129/month while for business customers, the 30Mbps plan starts at RM99/month and 100Mbps at RM139/month.
  Even with these lower priced plans, we note that the playing field is still uneven due to the different speeds offered under the operators’ packages. Also, the targeted market is different as Time DotCom and Celcom do not have the extensive nationwide connectivity of TM’s high-speed broadband network under Unifi. This means that consumers still are not able to switch fixed broadband providers in high-rise buildings, remote and rural areas.
• From new government’s agenda to lower broadband prices. Recall this development stems from the new Pakatan government’s drive to “double the speed at half the price” as Communications and Multimedia Minister Gobind Singh Deo said telcos had until 30 September this year to submit proposals for lower priced broadband packages to the MCMC.
• Time’s package still offers the best value. Time’s lowest priced package seems to offer the best value at RM0.99/Mbps for its 100Mbps plan, followed by Celcom’s RM2/Mbps, TM’s RM2.63/Mbps and Maxis’ RM2.97/Mbps. Except for Time’s plan, these prices do not include phone calls which will be charged based on each individual operators’ packages.

• Operators are promoting faster speed packages. Naturally, these fixed broadband operators are promoting their faster speed packages at higher price points. Currently, Time’s website does not seem to be promoting the 100Mbps plan at RM99/month. Instead, Time is promoting its 500Mbps plan with a 54% price cut at RM139/month while introducing a new 1GB package at RM199/month.

• New MCMC chairman to drive national agenda. The new MCMC chairman, Al-Ishsal Ishak, who was appointed on 1 October this year, has warned that he would ensure the government’s objective to provide high-speed broadband nationwide is achieved with some operators likely to be reprimanded over regulatory breaches. While we are uncertain which of the companies are likely to be given the warning, his comments seem to indicate that the issues could involve cellular operators.

• Negative for sector. We expect downtrading activities by consumers who are likely to opt for the lowest priced packages as the higher speed plans may not be necessary for the larger portion of the residential market.
  Hence, we view the lower fixed broadband prices as negative for the sector as higher demand from more affordable broadband prices will not be able to offset lower average revenue per user, which translates to substantial cuts in telco’s earnings prospects and lower reinvestment capability in rolling out fibre connectivity throughout the nation.
  We note that TM’s 1HFY18 normalised net profit has fallen by 40% YoY to RM261mil partly from lower wholesale prices caused by the implementation of the Mandatory Standard on Access Pricing structure since the beginning of the year. This means that TM will not be able to pay dividends of at least RM700mil while the group’s rising net gearing could impair its credit rating. Likewise, we expect Time dotCom’s earnings to be eroded as existing retail customers switch to its lowest priced plans.
  Digi does not offer fixed broadband services while Celcom’s minimal fixed broadband exposure will mean that the price cuts will not have any significant impact.
• Maintain NEUTRAL call given the continued intense competition in both the mobile and fixed broadband markets. We are UNDERWEIGHT on Maxis due to the impending impact of the revenue loss of its roaming arrangement with U Mobile together with the likely margin erosion in its home fibre business. Our only BUY for the sector is Axiata given its low EV/EBITDA of 5x, way below its 2-year average of 8x vs. Maxis' 12x and Digi’s 14x. Additionally, Axiata’s revenue growth prospects are improving for Celcom together with its overseas operations.

Source: AmInvest Research - 8 Oct 2018