Investment Highlights

• Total subscriber rose QoQ after MCO. After a drop in April–May, subscribers surprisingly rose after movement control order (MCO) restrictions were relaxed, translating to a 121K QoQ increase to 30.4mil subscribers in 2QFY20. The largest gain was in Maxis at 414K with a prepaid rise of 442K which was partly offset by a 32K decrease in postpaid users due to automatic cancellation after non-payment beyond 30 days. Celcom also showed a similar trend with prepaid subscribers increasing by 60K while postpaid shrank by 14K. Only Digi showed a drop of both prepaid and postpaid users, leading to a total 338K loss.

• But a mixed 2QFY20 report card. The telco sector’s 2Q2020 results, which bore the full brunt of the MCO in April–June, registered a mixed performance, with Digi and Axiata underperforming while TM outperformed due to significantly better cost improvement. Digi’s service revenue was dented by lower subscribers, ARPU, roaming and voice contributions during the MCO while Axiata’s earnings was dampened by higher deferred and overseas tax regimes. Maxis and Time dotCom’s (UNRATED) results were within expectations despite travel restrictions slightly dampening their marketing activities.

• Only Digi officially revealed new guidance. Since April–May this year when telcos withdrew or were reviewing their guidance to investors, only Digi officially provided a revised FY20F service revenue from a flat to low single-digit drop to low single-digit decline and EBITDA decline of a medium single-digit. While Axiata has not reinstated its withdrawn FY20F guidance during the analyst briefing, management affirmed expectations for a low single-digit decline in revenue and EBITDA while TM’s new management under CEO Imri Mokhtar indicated a low-to-mid single-digit FY20F revenue drop due to the fullyear impact of Streamyx repricing on the retail segment.

• Lower celco earnings. As we had forewarned about weaker upcoming earnings in our sector update on 29 May 2020, 2Q2020’s celco core net profit fell by 11% QoQ to RM771mil due to the impact of the MCO which weighed on service revenue, subscribers and ARPU. The worst affected was Celcom, which registered an 18% decline, followed by Digi at 13%.

• Weaker service revenues. Celcos’ service revenues dripped 8% QoQ to RM5.1bil largely from the prepaid segment for all operators and to a lesser degree, the postpaid segment even though the subscriber base recovered towards the end of June. This was exacerbated by a RM1/month decline in blended ARPU to RM45/month as both segments registered intense competition.

• Maxis’ overall subscriber base maintains lead position. In 2Q2020, Maxis’ subscriber market share of 38.6% retained its lead over Digi’s 35% while Celcom remained a distant third at 26%. This highlights Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services which have worked out better than Digi and Celcom’s. Recall that Digi has held the leading subscriber market share from 1Q2016 to 4Q2019 due to its strength in the prepaid segment, underpinned by the migrant population. However, Maxis has also overtaken Digi in the prepaid segment with the highest market share of 38%. Additionally, Maxis remains the leader in the postpaid segment with an ARPU and subscriber base which are higher by 16% and 25% respectively compared to Digi’s. While the postpaid segment accounts for 33% of Maxis’ subscriber base, it makes up 59% of the group’s 2QFY20 group service revenue.

• Intense competition for fixed and mobile segments. Amid the intense mobile competition with U Mobile, Digi has halved its entry-level plans for both postpaid and prepaid packages in an attempt to stave off the loss in market share. Recall that Digi has launched a postpaid package priced at RM38/month for 9GB of data and unlimited calls, halving its current postpaid offering of RM80/month for 40GB base data with another 40GB loyalty data. In June, Digi also launched its Internet Chili Padi prepaid plan offering 3GB and unlimited social media (Facebook, Instagram and Twitter) at only RM15/month, half of its 2QFY20 prepaid ARPU of RM29/month. In the fibre broadband market, TM’s unifi has been more aggressive in competing for market share with recent promotions of free 42” Sharp TV sets and redemption of the RM500 penalty fee for switching from Maxis Home Fibre. In Peninsular Malaysia, Celcom and Digi have begun to target selectively market segments in the Klang Valley for their fibre-to-home offerings.

• Consolidation on the way. As we highlighted on 11 August 2020, declining data yields, the government’s national fiberisation plan, new 5G spectrum fees and capex pressures are likely to drive players to seek consolidation amongst themselves to reduce costs, secure economies of scale and reduce rivalry. While the MCMC has shown a preference for maintaining competitive pressures to provide reduced broadband prices for consumers, we view that the industry’s stagnant revenue trajectory will eventually drive the sector towards more merger and acquisition activities, which are viewed as inevitable during Axiata’s analyst briefing last week.

• Maintain OVERWEIGHT with BUY calls for TM, which has shown significant cost improvements together with more compelling dividend yields and Axiata, offering bargain EV/EBITDA valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies.

Source: AmInvest Research - 3 Sept 2020