Investment Highlights

• Mixed 4Q2018 performance. The telco sector’s 4Q2018 results were somewhat mixed as normalised earnings of Digi and Axiata came in within expectations while TM did not suffer a profit erosion as bad as we had expected from the Mandatory Standard Access Pricing (MSAP) regime and repriced unifi options. Time dotCom’s results were stronger than expectations with its 2H earnings coming in above management’s guidance due to continued fixed broadband growth in the wholesale, retail and enterprise markets. Maxis underperformed due to additional costs for productivity enhancement and marketing for its fiberised solutions targeting the enterprise segment.

• Lower regulatory pressures on fixed broadband for now. As Communications and Multimedia Minister Gobind Singh Deo has recently indicated that high-speed broadband prices will not be cut this year, TM earnings prospects have stabilised for now with around 90% of TM's streamyx and unifi existing customers having been upgraded to faster speed packages while experiencing minimal downtrading activities together with manageable revenue declines in FY18. This is supported by Time dotCom’s experience wherein customers are taking up faster speed packages vs. more affordable options.

• Higher costs dampen celco earnings. Cellular operators’ (celco) 4Q2018 net profit fell 30% QoQ and YoY to RM790mil largely even though revenue improved, up 1% QoQ and 5% YoY, from higher average revenue per user (ARPU) and postpaid subscribers for Celcom and Digi. The lower bottom line stemmed from a 6ppt QoQ decline in net profit margin to 13% from Maxis’ additional marketing/operational costs and Celcom’s higher depreciation and tax charges.

• Total subscribers continue to contract amid tight competition and ongoing SIM consolidation, declining QoQ by 344K and 723K YoY to 31mil. A major portion of the YoY decline stems from Celcom, which lost 470K while Maxis shed 167K and Digi 86K. These contractions stemmed purely from the prepaid segment, which shrank by 606K QoQ and 1.5mil YoY to 22.5mil subscribers.

• Growing postpaid segment driving service revenue momentum. While the prepaid subscriber base continued to dwindle, the higher value postpaid segment grew 262K (+3%) QoQ and 790K (+10%) YoY. This underpinned the celco service revenue momentum, which increased by 1% QoQ and 5% YoY to RM6bil as blended ARPU rose by RM1/month to RM49/month.

• Maxis remains revenue leader despite Digi’s larger subscriber base. Digi continued to command the largest subscriber market share at 37% vs. Maxis’ 34% while Celcom remained a distant third at 29%. Digi’s pole position since 1Q2016 stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. However, Maxis is stronger in the postpaid segment with an ARPU and subscriber base which are 29% and 14% respectively higher than Digi’s. This places Maxis in the leading position with a 2018 revenue market share of 40% vs. 32% for Celcom and 28% for Digi.

• More celcos moving into fiberised solutions. Maxis, which is already an established player in the fiberised solutions via the leasing of TM’s High Speed Broadband network, is aiming to more aggressively penetrate the business and enterprise markets by offering converged offerings. Celcom has started offering home fibre solutions in Sabah while Digi is testing the waters at the Jasin pilot project in Melaka.

• No new aggressive plans since mid-2018. Since the middle of 2018, no celco has launched a comparable package to counter U Mobile’s prepaid GX30 which offers unlimited data with speeds up to 3Mbps for just RM30/month. Recall that U Mobile also launched postpaid GX50 which provides unlimited voice and data with speeds up to 5Mbps for RM50/month. Postpaid plans for Digi remained at RM58/month for 10GB data, Celcom offers RM80/month for 20GB data and Maxis RM98/month for 40GB. However, Digi also offers unlimited voice and data plans via online registration at a higher priced RM100/month for speeds of up to 10Mbps, similar to unifi mobile’s unlimited voice and data plan at RM99/month. Even though there appeared to be a half-year cease-fire in the postpaid wars, near- to medium-term revenue growth outlook remains weak against the backdrop of persistent pressure to gain market share. As U Mobile and unifi mobile wrestle for new customers on the unlimited mobile data arena, prospects for incremental service revenue accretions are unexciting at this stage, underscored by the sector’s tepid forward momentum over the past years.

• Maintain NEUTRAL call given the continued intense competition in both the mobile and fixed broadband markets. We have HOLD calls on Axiata, TM and Digi while Maxis is UNDERWEIGHT due to its premium valuations despite its FY19F guidance for an EBITDA decline amid additional capex for fiberised solutions, digitalisation and productivity capabilities.

Source: AmInvest Research - 6 Mar 2019