Investment Highlights

• Escalating celco wars with unlimited data plans. Following the launch of unlimited prepaid passes at RM35/month with speed caps at 3Mbps from Maxis and Celcom last month, we expect the current incumbents to introduce unlimited data plans for their postpaid segment as well; otherwise its existing customers could migrate to the lower priced prepaid segment. For now, U Mobile and Digi are the only celcos offering stand-alone unlimited postpaid data plans. U Mobile’s GX50 postpaid plan offers unlimited data and calls plus 5GB of hotspot sharing at a discounted RM40/month (from RM50/month). Digi offers its Infinite online plan with unlimited data at speeds up to 10Mbps and calls at RM100/month while Unifi Mobile is priced at RM99/month. For over 2 years, Maxis has bundled its Home Fibre services by offering postpaid plans with unlimited data starting at RM98/month while Celcom does not have an unlimited postpaid package currently.
  
  Digi’s newly launched prepaid package offers 3GB of data and unlimited social media for only RM15/month while Unifi Bebas offers 4GB data at RM30 with no validity period, at RM7/hour for voice calls. Meanwhile, Celcom offers unlimited calls at RM80/month with data quota of 30GB. As such, we await postpaid packages being launched by Maxis and Celcom over the next few months in tandem with the escalating cellular wars which will constrain any increase in average revenue per user (ARPU).

• Regulatory U-turn with political changes. With the recent change in the Minister of Communications and Multimedia, and chairman of the Malaysian Communications and Multimedia Commission (MCMC) following the new federal government, there may be a perceived opacity in the decisions of the regulator. Recall that within a few days of awarding 700MHz spectrum blocks to 5 companies without a tender last month, the minister recanted on the spectrum allocation, including the 900MHz and 2600MHz bands which are currently being deployed for 3G/4G usage, subsequently resuming further discussions with industry players that could potentially delay domestic 5G rollouts by a year.
  
  Back in October 2017, the MCMC had offered up to 8 blocks of 700MHz bands for a 15-year spectrum assignment to mobile operators. However, earlier this year, the MCMC decided that instead of allocating the 700MHz and 3.5GHz bands to individual licensees as for the 900MHz and 1,800MHz spectrums, the regulator planned to assign these bands to a single entity comprising of a consortium of multiple licensees to minimise costs and prevent duplication of infrastructure against the backdrop of additional spending requirements to enhance 4G networks.

• Total subscriber trajectory continued its downward trend from prepaid attrition 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.

• Reintroducing FY20F guidance in 2QFY20. Following the 1QFY20 results’ season, all telcos withdrew 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. However, with the relaxation of the movement control order, Digi’s recent 2Q20 results briefing has reintroduced guidance for a lower FY20F service revenue at a low single-digit contraction and EBITDA decline of medium single-digit decrease from flat to low single-digit reduction.

• Maxis remains the leading celco. 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.

• 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 the 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 higher-thanexpected 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 - 21 Jul 2020