Investment Highlights

• 4Q2019 performance report card in line. The telco sector’s 4Q2019 results performance was mostly in line with only Axiata coming in slightly above expectations due to lumpy realised forex gains. A stronger 4Q2019 performance from cellular operators (celco) was partly dented by TM’s 34% QoQ contraction due to higher year-end expenses. Likewise, Time dotCom’s (UNRATED) FY19 net profit growth of 9% was largely within market expectations, despite its 4Q2019 net profi declining by 9% QoQ from doubtful debt provisions and financial guarantees.

• Slightly higher celco earnings. Celco core net profit in 4Q2019 rose slightly by 2.7% QoQ to RM937mil as Celcom’s stringent cost reduction efforts were partly offset by higher year-end expenditures at Maxis and Digi.Com. The loss of 3G network-sharing contract from U Mobile also contributed to the higher 4QFY19 QoQ decline of 5% for Maxis vs. 4% for Digi

• Total subscriber trajectory continued its downward trend in 4Q2019 after a brief uptick in 2Q2019 which highlights the still intense mobile competition. Mobile subscribers decreased by 643K QoQ as prepaid declines of 841K were only able to be partially offset by postpaid additions of 198K. Only Maxis registered an 88K net increase while Celcom declined by 251K and Digi by 480K.

• Higher year-end device sales and postpaid revenue. Celcos’ service revenues rose 8.7% QoQ to RM6bil on postpaid segment growth and seasonally higher device sales, largely driven by a sharp increase of 13% QoQ from Maxis. This was further supported by blended average revenue per user (ARPU) rising slightly RM1/month QoQ to RM48 mainly from the postpaid segment. YoY, celco service revenue slid 1% due to a 10% contraction from Celcom’s declining subscriber base partly offset by Maxis’ commendable growth of 6%.

• Maxis’ overall subscriber base finally outpaces Digi. Since 1Q2016, Digi has held the leading subscriber market share for 4 years due to its strength in the prepaid segment, underpinned by the migrant population. However, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services appear to be working out better than Digi and Celcom’s. In 4Q2019, Maxis’ subscriber market share of 36.7% has finally overtaken Digi’s 35.7% while Celcom remained a distant third at 27.6%. Additionally, Maxis remains the leader in the postpaid segment with an ARPU and subscriber base which are higher by 17% and 24% respectively compared to Digi’s. While the postpaid segment accounts for 34% of Maxis’ subscriber base, it makes up 55% of its FY19 group service revenue. As a comparison, Digi’s postpaid segment accounts for 28% and 48% of its subscriber base and group service revenue respectively in FY19.

• Rising mobile competition with unlimited products. Last month, Celcom introduced a postpaid plan with unlimited data with its MEGA product launch at RM98/month with a hotspot quota of 5GB/month. Almost simultaneously, U Mobile launched a new GX38 prepaid plan which offers unlimited data at a promotional price of RM35/month with a speed cap of 6Mbps compared with 3Mbps for its existing GX30 plan priced at RM30/month. U Mobile’s new GX68 plan at RM58/month for life if subscribers signed up during the promotional period, offers unlimited data, speed and calls with 6GB of hotspot data. For comparison, Digi currently offers its Infinite online plan with unlimited data and calls at RM100/month while Unifi Mobile is priced at RM99/month. Maxis currently does not have an unlimited data plan, with the highest MaxisOne quota of 60GB priced at RM188/month. Given Celcom’s new plans, we expect the remaining players to introduce similar products agains the backdrop of the industry’s declining subscribers.

• Maintain NEUTRAL outlook on the sector given the rising mobile competition amid escalating capex requirements agains the backdrop of government-targeted fiberised ARPU reductions under the National Fiberisation and Connectivity Plan (NFCP). Our only BUY currently is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

• Sector can be de-rated on resumption of revenue declines against the backdrop of escalated mobile price war and looming sharp drops in fixed broadband prices this year, driven by NFCP prerogatives. We are also cautious on possibilities of higher-than-expected increase in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G rollouts.

• Sector can be upgraded on renewed consolidation prospects amongst the current 6 main cellular operators which could lead to a moderation in mobile price competition, indefinite suspension of the MCMC’s plans to reduce broadband prices this year and significant contraction in operating costs from increased infrastructure-sharing arrangements amongst operators.

Source: AmInvest Research - 5 Mar 2020