BInvestment Highlights

• Better 3QFY20 report card. The telco sector’s 3Q2020 results have shown substantive improvement with Axiata Group and Telekom Malaysia (TM) beating market expectations while Maxis and Digi were in line. The top outperformer was Axiata which registered a sharp rebound in revenue growth and cost reduction following Covid-19 restrictions on subscriber accretions in 2Q2020. TM’s results, which came in above street’s, were nevertheless within our expectations as we have incorporated higher cost reduction assumptions. Time dotCom (UNRATED) likewise registered 9MFY20 results that were within expectations on revenue growth of 11% despite travel restrictions still slightly dampening their installation capabilities.

• Celco earnings recovery. 3Q2020 celco core net profit recovered with an increase of 20% QoQ to RM925mil after contracting by 11% QoQ in 2Q2020 due to the impact of the MCO which dented service revenue, subscribers and ARPU parameters. The best performer was Axiata’s Celcom, which spearheaded a sizzling 66% QoQ surge to RM240mil in 3Q2020 after an 18% decline in 2Q2020. This was followed by Digi, which rose 11% QoQ and Maxis’ 8% QoQ.

• Driven largely by higher service revenues. Celcos’ 3Q2020 service revenues rose 6% QoQ to RM5.4bil after decreasing by 8% in 2Q2020. This drove EBITDA by 8% QoQ and EBITDA margin increasing by 2 ppt to 16.2%. The higher service revenue stemmed from average revenue per user (ARPU) rising by RM2/month to RM42/month and postpaid subscribers increasing by 76K QoQ to 9.8mil.

• However, net subscribers contracted. Cellular net subscribers tumbled by 188K to 30.2mil in 3Q2020 after registering a surprisingly strong 121K QoQ increase in 2Q2020. Maxis again was the main cause of the variation as the group registered an unexpected 618K reduction in subscribers vs. a net gain of 373K for Celcom and 57K for Digi. The main drag stemmed from a fall of 277K prepaid users to 20.2mil, wholly attributable to Maxis’ 683K drop with the removal of revenue-generating subscribers beyond 30 days, SIM consolidation and intense competition. This was the only prepaid decline amongst operators as Celcom managed to register a 339K rise with the launch on unlimited data packages while Digi rose by 67K.

• Only Maxis has not provided FY20F guidance. Since April-May this year when telcos withdrew or were reviewing their guidance to investors, only Maxis has yet to provide fresh projection following its ‘flat to low single-digit increase’ for FY20F service revenue and normalised EBITDA. Axiata, which expects a softer 4Q2020, has indicated low single-digit decline for revenue and EBITDA for 2020 while TM expects low-to-mid single digit decline in revenue with EBIT at RM1.3bil–RM1.5bil.

• Maxis loses prepaid lead to Digi. In 3Q2020, Maxis’ overall subscriber market share of 37% retained its lead over Digi’s 35% while Celcom remained third at 28%. However, Digi has now retaken its pole position in the prepaid segment with the highest market share of 38% from Maxis, which has fallen to 35% following its sharp 3Q2020 reduction. 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. Nevertheless, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services remains formidable as compared to Digi and Celcom’s.

• Unrelenting competition in mobile and rising for fibre. In our view, U Mobile's RM30 prepaid package, which offers unlimited data and 6GB hotspot with speed cap of 6Mbps together with RM5/month top-up for unlimited calls, remains the frontline in the mobile wars. However, Digi’s current entry-level plans for prepaid packages at RM15/month and postpaid at RM38/month are gaining traction even with limited data quotas. Recall that 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 3QFY20 prepaid ARPU of RM33/month. In the fibre broadband market, TM’s unifi has been aggressively 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 still on the cards. As we highlighted on 11 August 2020, declining data yields, 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 reduce broadband prices for consumers, we maintain our view that industry players will likely engage in merger and acquisition activities, which was reaffirmed during Axiata’s Analyst & Investor Day conference yesterday.

• Maintain OVERWEIGHT with BUY calls for TM, which has shown significant cost improvements together with more compelling dividend yields, and Axiata, which offers bargain EV/EBITDA valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies. These valuations are even more compelling given their 3–4-star rating for ESG compliance on the FTSE4GOOD INDEX.

Source: AmInvest Research - 4 Dec 2020