Investment Highlights

• 9M2021 within expectations. The telco sector’s 9M2021 results were largely in line with our expectations. TM’s 9MFY21 earnings rose 12% from higher wholesale data demand and unifi subscribers despite a 7% operating cost increase from higher customer acquisition and installation costs during Covid-19 movement control orders (MCO). Time dotCom (UNRATED) likewise posted results that were within expectations notwithstanding above-industry earnings growth of 22%.

• Improving celco earnings. Sequentially, 3Q2021 cellular operators’ (celco) core net profit rose by 8% QoQ to RM872mil on lower operating costs, partly offset by a 1% QoQ dip in revenue to RM5.4bil. Lower operating expenses largely caused 3QFY21 celco EBITDA margin to inch higher by 1.2 percentage points QoQ to 45%.
  While Maxis’ 3QFY21 core earnings dropped 10% on increased depreciation/amortisation charges due to shortened useful lives of the group’s spectrum rights, the sector generally expects a stronger 4QFY21 given the relaxation of movement restrictions.

• Supported by higher users. Overall, cellular net subscribers increased by 285K QoQ due to both prepaid (+163K) and postpaid (+90K) segments. The proportion of postpaid users has marginally slid QoQ to 33.5% in 3Q2021, but still up from 32.5% in 3Q2020 and 24% in 1Q2017, as celcos have been encouraging subscribers to migrate to higher priced postpaid plans. Even so, the prepaid segment remains a key celco market which is still attracting new entrants, especially in the youth segment.
  All in, blended 3Q2021 average revenue per user (ARPU) remained largely stable QoQ at RM45/month, almost the same level in 1Q2017 as postpaid price declines were mostly offset by the relatively higher value segment’s increased subscribers.

• Maxis is still the market leader in both postpaid and prepaid segments. In 3Q2021, Maxis’ pole position in terms of subscriber market share slid to 37.1% from 37.5% in 2QFY21 due to a loss of 20K subscribers during the MCO lockdowns. Besides its continued lead in the postpaid segment, Maxis also retained its top position in the prepaid category at a market share of 35.5%; albeit lower than 38% in 2Q2020 as other operators gained faster traction in this segment. Nevertheless, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services have proven to be effective with a stable blended 3Q2021 ARPU of RM47/month.

• Continued competition in bundled mobile and fibre propositions. Together with other celcos, U Mobile has finally joined in the convergence propositions to offer fibre in Melaka, Cyberjaya, Perak and Kedah starting at attractive discounted rates of RM64.50/month for speeds of 100Mbps. 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.
  In the fibre broadband market, TM’s 3Q2021 unifi subscriber growth has reached a second consecutive record 208K – 8.3x Maxis’ 25K – from aggressive promotional campaigns and focused plans to expand distribution networks and direct connectivity to homes.

• 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 with equal access to the infrastructure to roll out 5G services nationwide, expected to begin in stages by the end of this year. Hence, 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 for Microsoft, Google, Amazon and TM to build and manage hyperscale 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 fibre-optic network and extensive partnerships to support the building of third-party data centres, thus partly alleviating high capex requirements.

• Maintain OVERWEIGHT rating on the sector with BUY call for TM, which has shown significant cost improvements and poised under brighter revenue prospects under the government’s MyDigital initiatives. Maxis remains a HOLD, currently trading at a fair CYF22 EV/EBITDA of 11x, slightly below its 3-year average of 12x.

Source: AmInvest Research - 6 Dec 2021