Investment Highlights

• Mixed 3Q2019 performance report card. The telco sector’s 3Q2019 results performance were mixed as Digi.Com came in within expectations while TM outperformed as it continued its commendable improvement in its cost structure. Maxis, which managed to partly mitigate the loss of wholesale network sharing revenues from U Mobile, recorded higher postpaid accretions. Axiata Group’s results were below expectations due to lower roaming prices while consumption taxes dented Nepal-based NCELL’s earnings. While Time dotCom’s (UNRATED) 9MFY19 net profit growth of 15% YoY far surpassed its tepid telco peers, this largely came within the market’s sanguine expectations.

• Lower celco earnings. Cellular operators (celco) 3Q2019 core net profit decreased 10% QoQ to RM912mil from all 3 main operators as Celcom was impacted by lower roaming revenues and together with Digi, continued to experience lower service revenue and higher operating costs. Additionally, Maxis continued to lose wholesale revenue from U Mobile with the termination of its radio access network (RAN) sharing agreement last year.

• Total subscriber trajectory returned to its downward trajectory in 3Q2019 after a brief uptick in the previous quarter which highlights the still intense mobile competition. Mobile subscribers decreased by 46K QoQ as prepaid declines of 226K was only able to be partially offset by postpaid additions of 180K. Only Maxis registered a 141K increase while Celcom declined by 153K and Digi by 34K.

• Growing postpaid segment stabilising service revenue. With the higher value postpaid segment growth, celco’s service revenues largely stabilised QoQ, even though Celcom was partly impacted by lower roaming fees. This was further supported by average revenue per user (ARPU) rising slightly QoQ to RM47.70 as average postpaid ARPU rose by RM1/month to RM71/month.

• Maxis remains revenue leader despite Digi’s larger subscriber base. Digi continued to command the largest subscriber market share at 37% vs. Maxis’ 36% while Celcom remained a distant third at 28%. Digi’s pole position since 1Q2016 stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. However, Maxis remains the leader in the postpaid segment with an ARPU and subscriber base which are 20% higher than Digi’s. This places Maxis in the leading position with a 9M2019 revenue market share of 41% vs. 30% for Celcom and 28% for Digi.

• Negative on the rollout of the National Fiberisation and Connectivity Plan (NFCP) over a 5-year period from this year to 2023. The NFCP rollout could cost RM21.6bil, of which 50%–60% may be financed by the MCMC's Universal Service Provider fund that currently holds RM8bil. This is in line with the government's objective to recognise access to the internet as a basic right, ensuring equal access to the internet for both urban and rural residents.
  
  Given TM's role as the national broadband provider, the group may bear up to half of the NFCP cost, which translates to RM2.2bil over the next 5 years. Besides TM's own capex requirements, the NFCP rollout alone translates to 19% of FY20F revenue – already above management's FY19F capex target of 18% and 9% in 9MFY19. Additionally, the thrust of the NFCP towards connecting the rural population could mean that revenue accretion from these investments will be minimal.

• Negative revenue outlook for NFCP players. One of the NFCP targets is to achieve an entry-level package amounting to 1% of GNI, which translates to only RM40/month, which is half of TM’s Unifi Basic currently priced at RM79/month for 60GB data vs. Celcom’s RM80/month for 30Mbps, Maxis’ RM89/month for 30Mbps, Time dotCom’s RM99/month at 100Mbps and Digi’s RM99/month at 50Mbps. For further comparison, TM’s 3QFY19 Unifi ARPU average was higher at RM167/month.
  
  Hence, the government may again be looking at further broadband price cuts next year, which will negatively impact the average revenue per user (ARPU) trajectory of broadband network owners such as TM and Time dotCom. However, the margin impact may be largely mitigated for third-party operators like Maxis, Axiata’s Celcom and Digi, which may be leasing TM’s fibre network at correspondingly lower rates.

• These costs exclude additional 5G spectrum fees and rollout capex. While 5G spectrum allocations have not been determined at this stage, and the MCMC having alluded to a fair price to facilitate the rollout of this vastly faster service, we expect these additional fees and capex, which could be up to 10x 4G spending levels, to further raise the gearing levels of mobile operators.

• Maintain NEUTRAL outlook on the sector given the escalating NFCP-driven capex requirements against the backdrop of government-targeted fiberised ARPU reductions. Our only BUY currently is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

Source: AmInvest Research - 3 Dec 2019