Investment Highlights

• Mildly below market expectations. While the telco sector’s 4Q2020 results were generally in line with our expectations, Maxis and Digi underperformed market estimates by 5%–6%. Axiata posted stronger-than-expected normalised earnings due to sharp operating cost reductions from Celcom as well as operations in Bangladesh and Nepal. Time dotCom (UNRATED) likewise registered FY20 results that were within expectations, notwithstanding above-industry revenue growth of 10%.

• Flattish celco earnings. Sequentially, 4Q2020 celco core net profit was flat at RM926mil despite a revenue increase of 1.3% to RM5.4bil due to seasonally higher year-end operating costs and depreciation charges in Maxis and Digi. The best performer was Axiata’s Celcom, which spearheaded a 36% QoQ increase to RM327mil, the highest over the past 3 years. This stemmed from higher service revenue together with lower opex and depreciation charges.

• Likewise, margin is flat. While celcos’ 4Q2020 service revenues rose 1.3% QoQ, EBITDA margin was flat at 45% QoQ due to the higher operating charges. The higher service revenue stemmed from mobile subscribers increasing by 183K QoQ to 30.4mil, partly offset by blended average revenue per user (ARPU) dropping by RM1/month to RM45/month.

• Supported by higher postpaid users. After lagging the sector over the past 2 years, Celcom registered the highest net subscriber gains of 278K vs. Maxis’ 145K and Digi’s net contraction of 240K. Cellular net subscribers increased due to postpaid subscribers rising by 177K QoQ to 10mil vs. a contraction in prepaid users by 9K QoQ to 20.2mil. The proportion of postpaid users has gradually risen to 33% in 4Q20 from 25% in 4Q17, as celcos have been encouraging subscribers to migrate to higher priced postpaid plans.

• Only Maxis has not provided FY21F guidance. Since April–May last year when telcos withdrew or were reviewing their guidance to investors, only Maxis has refrained from providing any FY21F prospects due to the uncertain economic impact of the ongoing Covid-19 pandemic. Both Axiata and TM are projecting flat to low single-digit revenue growth while Digi expects low single-digit decline for both service revenue and EBITDA.

• Maxis remains market leader. In 4Q2020, Maxis’ overall subscriber market share expanded slightly to 37%, retaining its pole position over Digi’s 34% while Celcom remained third at 29%. However, Digi maintained its leading position in the prepaid segment with the highest market share of 37%, just slightly ahead of Maxis’ 35.5%. Nevertheless, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services remain formidable, with a blended 4Q2020 ARPU of RM48/month vs. Celcom’s RM46/month and Digi’s RM42/month.

• 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. Digi’s current entry-level plans for prepaid packages at RM15/month and postpaid at RM40/month are also gaining traction even with limited data quotas. In the fibre broadband market, TM’s unifi remains 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 selectively targeted market segments in the Klang Valley for their fibre-to-home packages bundled with cellular plans.

• MyDigital boost to TM. The government’s MyDigital initiative involves investing RM15bil over 10 years via a wholly government-owned special purpose vehicle (SPV) called Digital Nasional, which will own, execute and manage 5G spectrum and infrastructure. This is envisaged to allow licensed telcos equal access to the infrastructure to roll out 5G services nationwide, expected to begin in stages by the end of this year. We view this as being neutral to cellular operators who will not be burdened by the 5G capex. However, being the owner of the nationwide High Speed Broadband fiberised network, we believe that this is positive for TM and to a lesser extent, Time dotCom, in providing the critical backhaul backbone system for 5G networks.

The government has also given conditional approvals to Microsoft, Google, Amazon and TM to build and manage hyper-scale data centres as well as provide hybrid cloud services, valued between RM12bil and RM15bil over the next 5 years. While this will benefit TM One’s data centre operations, we expect TM to leverage its fixed play dominance provided by its national fibreoptic network and extensive partnerships to support the building of third-party data centres, thus partly alleviating high capex requirements.

• 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 Mar 2021