Investment Highlights

• Uncertain digital yield. The Edge Malaysia weekly reported recently that Axiata Digital Services has expressed interest in pursuing a digital banking licence based on its QRedit platform, which currently offers small loans to micro-merchants in Malaysia and Indonesia and the Boost app, which provides e-wallet and e-payment services.

We note that Digi has also been offering customised digital solutions for businesses such as e-wallet Vcash and iFleet Intelligent GPS Tracking & Fleet Management System, which may gain momentum following the realisation of the proposed Axiata-Telenor Asia merger. However, we do not expect any meaningful earnings contribution in the foreseeable future given the indeterminate gestation period for start-up digital services.

• Merger and cost optimisation continue to drive excitement. Prospects for the sector have structurally transformed with the proposed merger amid rising evidence of cost optimisation benefits for TM. The consolidation between the operations of Celcom and Digi will reduce the number of cellular competitors to 4 from 5 as the now dominant merged entity will unlikely initiate further price cuts that will only erode its bottom line.

The Telenor-Axiata entity’s combined US$6bil capex could be optimised while procurement synergies could lead to lower overall costs together with the higher market capitalisation of the merged entity offering an opportunity for Khazanah Nasional to monetize its 40% equity stake in Axiata. Depending on the Malaysian Communications and Multimedia Commission’s (MCMC) decision regarding the reduction of competition in the cellular segment, the merged entity is envisaged to secure 5-year synergies up to RM15–20bil in its present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale. This represents 21%–29% of the potential market capitalisation of the merged entity.

Separately, TM’s cost optimisation drives could be heightened over the next few quarters, spurring growing market conviction that will catalyse further revaluation cycles which has caused its share price to surge 50% since its 1QFY19’s outperformance.

• Maxis freed to pursue its convergence strategy. As the merger synergies for Telenor-Axiata entity could take at least 2 years to materialise, we expect Maxis to be freed to aggressively pursue its converged fiberised solutions for its consumers, enterprise and business segments, allowing the group to revitalise its revenue growth momentum.

Currently, Maxis is offering its 4G LTE mobile network as a backup internet for its “Prime” customers. Available at a minimum RM187/month, MaxisOne Prime combines Maxis Postpaid and fibre broadband service into a single plan which gives “Prime” customers a 4G LTE dongle to be used together with a fibre modem at home, allowing continued connectivity to the internet even when their Home Fibre service is down/offline.

• Radical transformation of TM’s cost structure. The GLC restructuring story has been highlighted by TM demonstrating a surprisingly sharp drop in 1QFY19 operating costs, supported by the group's transformative Performance Improvement Programme. This in an ongoing initiative that has been carried out since mid-2018, leading to cost optimisation in unifi mobile's domestic roaming, contract renegotiation, marketing, business procurement and manpower. We do not expect any significant cost escalation from the appointment of TM, Celcom and Maxis as 2H2019 interim internet service providers for 10,000 schools nationwide after the expiry of YTL Communications’ 1BestariNet phase 2, given the existing established network infrastructure.

• No upcoming broadband cuts. As Communications and Multimedia Minister Gobind Singh Deo has indicated that high-speed broadband prices will not be further cut this year, TM earnings prospects have stabilised with all 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 so far.

• Total subscribers continue to contract amid tight competition and ongoing SIM consolidation, declining QoQ by 533K and 1.1mil YoY to 31mil. A major portion of the YoY decline stems from Celcom losing 649K and Digi 506K while Maxis increased by 51K. These contractions stemmed purely from the prepaid segment, which lost 704K QoQ and 1.9mil YoY to 21.8mil subscribers.

• Maintain our OVERWEIGHT call on the sector given multiple synergies from the Telenor Asia-Axiata merger, which will significantly alleviate price competition that has been eroding the sector’s margins over the past 3 years. The GLC restructuring story has re-emerged, together with TM’s radical cost transformation. Hence, we reiterate our BUY calls for Axiata and Digi while Maxis and TM remain HOLDs.
• Sector can be derated on resumption of revenue declines amid a declining mobile subscriber base while fixed broadband prices remain relatively high regionally. Besides the resumption of mobile wars if the MCMC were to impose any significant restrictions on the Telenor Asia-Axiata merger, the fixed broadband segment under TM’s unifi, Maxis’ Home Fibre and Time dotCom could still experience declining ARPUs should the government revise its position on further price reductions to spur on an increasingly data-intensive socio-economy.

Source: AmInvest Research - 4 Jul 2019