Investment Highlights

• Bargain valuations. Attractive valuations have emerged from the sharp selldown of telco stocks over the past week on fears of a government lockdown, which materialised into a 14-day movement control order (MCO) nationwide 18–31 March to curb the spread of the novel coronavirus (Covid-19) infection in Malaysia. Recall that this means all government and private sector premises will cease operating, with the exception of premises involved in the provision of essential services such as water, electricity, energy, telecommunications, post, transportation, irrigation, oil, gas, fuel and lubricants, broadcasting, finance, banking, health, pharmacies, fire and rescue, prisons, ports, airports, security, defence, public cleansing, retail and food supply.

• Earnings unlikely to be affected. In our view, these negative sentiments are over-exaggerated as these Covid-19 movement restrictions are unlikely to dampen the earnings prospects of fixed broadband and cellular operators (celcos). On the contrary, restricted movement on the population is likely to drive up mobile data demand, which has already been experiencing explosive growth over the past 5 years. Nevertheless, given the pricing structures of fibre and 4G packages, the sales revenue of these operators will only increase if significant numbers of existing or new subscribers switch to higher value packages. In our view, this is less probable as the MCO is expected to last for only 14 days while mobile users would more likely deploy home/office wifi connected to fibre broadband which are mostly based on unlimited data plans. Hence, we maintain the forecasts of the telco stocks under our coverage.

• Celco’s service revenues are still rising, albeit at a slow but steady pace from postpaid accretions. YoY, celcos’ 4Q2019 service revenue slid 1% due to a 10% contraction from Celcom’s declining subscriber base, partly offset by Maxis’ commendable growth of 6%. However, on a QoQ comparison, their service revenues rose 8.7% 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 increase in postpaid subscribers.

• Mobile competition remains intense. 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 partially offset by postpaid additions of 198K. Only Maxis registered an 88K net increase while Celcom fell by 251K and Digi by 480K. 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 against the backdrop of the industry’s declining subscribers.

• We upgrade our recommendation on the sector to OVERWEIGHT from NEUTRAL as valuations of Maxis and Digi have become attractive given the recent price drops. While retaining our fair values at RM5.76 for Maxis and RM4.70 for Digi, we have upgraded them to BUYs. We also retain our BUY currently on Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses. TM remains a HOLD against the backdrop of government-targeted fiberised ARPU reductions under the National Fiberisation and Connectivity Plan (NFCP).

• 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.

Source: AmInvest Research - 18 Mar 2020