Investment Highlights

• Less optimistic 1QFY20 report card. The telco sector’s 1Q2020 results performance was disappointing as Digi, Maxis and Axiata Group came in below expectations due to higher operating costs and IFRS 16 lease accounting-driven depreciation charges. TM’s normalised net profit, which fell 19% YoY from declining Streamyx subscribers and average revenue per users (ARPU), was in line with expectations. While registering an outstanding net profit growth of 55% YoY from strong overall revenue expansion amid non-recurring gains on contractual penalties and forex gains, Time dotCom’s (UNRATED) 1QFY20 results were still largely within consensus’ sanguine expectations.

• Reviewing FY20F guidance. All telcos have withdrawn or currently reviewing their earlier FY20F guidance for revenue, EBITDA and capex due to the uncertain Covid-19 impact on net subscription rates for celcos with the closure of retail outlets commencing 18 March 2020 amid the Streamyx repricing process for TM. We highlight that net subscription rates have yet to account for the full impact of the ongoing Covid-19 movement restrictions.

• Lower celco earnings. 1Q2020 celco core net profit fell by 7% QoQ to RM869mil largely on lower revenues and higher depreciation charges which include IFRS 16 lease charges and traffic costs. This was exacerbated by lower subscribers for Celcom’s postpaid and prepaid segments which experienced IT delays in new launches amidst Covid-19 movement restrictions.

• Total subscriber trajectory continued its downward trend after a brief uptick in 2Q2019 amid the still intense mobile competition. Mobile subscribers decreased by 580K QoQ as prepaid declines of 704K were only able to be partially offset by postpaid additions of 124K. Only Maxis registered a 91K net increase while Celcom declined by 390K and Digi by 281K.

• Lower service revenues. Celcos’ service revenues fell 9% QoQ to RM5.5bil largely from the prepaid segment for all operators and to a lesser extent, Celcom’s postpaid segment. This stemmed from lower subscribers together with lower ARPUs for both divisions as blended ARPU contracted RM3/month QoQ to RM45.70/month.

• Maxis’ overall subscriber base retakes lead position. Since 1Q2016, Digi has held the leading subscriber market share 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 1Q2020, Maxis’ subscriber market share of 37.2% has finally overtaken Digi’s 36.4% while Celcom remained a distant third at 26.4%.
  
  Additionally, Maxis remains the leader in the postpaid segment with an ARPU and subscriber base which are higher by 23% and 24% respectively compared to Digi’s. While the postpaid segment accounts for 34% of Maxis’ subscriber base, it makes up 58% of the group’s 1QFY20 group service revenue. As a comparison, Digi’s postpaid segment accounts for 28% and 47% of its subscriber base and group service revenue respectively in 1QFY20.

• Intense mobile competition with unlimited data. Earlier this year, Celcom introduced a postpaid plan with unlimited data with its MEGA product launch at RM98/month with a hotspot quota of 5GB/month. U Mobile also has 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. 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. While operators are navigating cautiously under the current movement restrictions, we do not preclude future erosion in ARPUs from new pricing challenges.

• Maintain NEUTRAL outlook on the sector given the unmitigated mobile competition amid escalating capex requirements against the backdrop of the National Fiberisation and Connectivity Plan (NFCP) agenda to improve national connectivity and affordability. 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 potential cuts in fixed broadband prices this year under NFCP prerogatives. We are also cautious on possibilities of higherthan-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, official suspension of the MCMC’s plans for further broadband price cuts and significant contraction in operating costs from increased infrastructure-sharing arrangements amongst operators.

Source: AmInvest Research - 29 May 2020