Investment Highlights

• Net subscribers expanded. Cellular net subscribers increased by 208k to 31.7mil in 3Q2022 as a decline in Celcom subscribers by 117k was offset by a net gain of 119k for Maxis and 206k for Digi. Maxis’ net increase in subscribers was mainly attributable to postpaid segment from Maxis and Hotlink. On the other hand, Digi’s prepaid segment reported the strongest growth since 2020 with net additions of 177k, likely due to returning of migrant workers while the postpaid segment net additions was 164k, driven by its attractive bundling offerings.

• Maxis maintained its market leadership with an overall subscriber market share of 37% vs. Digi’s 34% while Celcom remained third at 30%. However, Digi has now retaken its pole position in the prepaid segment with the highest market share of 35% from Maxis, which comes a close second at 34%. Nevertheless, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services remain superior compared to Digi and Celcom. Recall that Digi was the market leader in term of subscriber market share between 1Q16 and 4Q19, backed by its strength in the prepaid segment.
  Separately, the 3 largest mobile network operators’ (MNOs comprising Maxis, Digi, and Celcom) 3Q22 blended average revenue per user (ARPU) was largely stable at RM44.3/month (vs. RM44.6/month in 2Q22 and RM44.9/month in 3Q21).

• Key MNOs’ 3Q22 earnings improved 6% sequentially to RM870mil despite a flattish revenue of RM1.5bil (-0.3% QoQ). The margin improvement was mainly attributed to disciplined cost management at Digi and Celcom, which led to the decline in operating expenditure. The best performer was Digi which saw normalised PATAMI jump 14% QoQ to RM242mil after its lacklustre 2Q22 performance. This was followed by Axiata Group’s (Axiata) Celcom, which registered PATAMI growth of 12% QoQ while Maxis declined 4%, dragged by higher amortisation costs. 
  Post-3Q22 results, Maxis and Digi made no changes to their FY22F normalised EBITDA guidance. Maxis retained flat-tolow single-digit increase and Digi low single digit decline. Meanwhile, Axiata expects tol beat its high single-digit EBIT growth target. TM revised its EBIT guidance to more than RM2.3bil from more than RM1.8bil previously, and revenue to mid-to-high single-digit from low-to-mid single-digit growth.
• Digi-Celcom merger completed on 30 November 2022. After the merger, Axiata Group (Axiata) and Telenor Asia (Telenor) will have equal ownership in the merged entity at 33.1%. Recall that the corporate exercise involved transferring its 100% equity interest in Celcom to Digi for a total consideration of RM17.8bil which is satisfied via cash and new Digi shares. Upon completion, Axiata received 33.1% of Digi new shares and cash of RM2.5bil. 3 months after the completion of the merger, an extraordinary general meeting will be convened for shareholders’ consideration to change the merged entity name to Celcom Digi. The company previously shared a synergy target of RM8bil over a 5-year period from the merger.
• Digital Nasional (DNB) equity structure finalised. With the completion of the merger, the Digi-Celcom merged entity will own a 25% equity stake in DNB, while TM and YTL Communications will hold 20% with the remaining 35% equity stake going to the Ministry of Finance. On 5G wholesale capacity charges, the merged entity’s minimum commitment will be a combined value of Celcom and Digi as the access agreement was signed prior to the completion of the merger. Recall that the 5 telcos, namely Digi, Celcom, YTL Communications, U Mobile and Telekom Malaysia (TM), that signed the access agreement are committing to a minimum capacity commitment of 800Gbps/month, which translates into a wholesale fee of RM288mil per annum.
• Maintain NEUTRAL outlook on the sector as the higher opex from DNB’s fixed 5G annual wholesale capacity charge on telcos will likely more than offset escalated data demand. While the consolidation of 2 major cellular operators may help to ease competition, the slower economic growth outlook and sustained inflationary pressure could depress subscribers’ affordability. However, we may upgrade the sector if the global recession next year turns out to be shallower-than-expected together with positive reception by consumers towards the 5G product rollouts. A negative sharp turn in consumer sentiments due to sustained inflation and recessionary fears could cause us to downgrade our rating. On the government’s plan to review DNB’s 5G network deployment, we would be positive on any potential revision of the contracts awarded could reduce leakages with the cost savings trickling down to the telcos.
• Reiterate our BUY call for TM (FV RM7.24) as we continue to see the group as the sole beneficiary for Malaysia’s 5G roll-out given its ownership of the High-Speed Broadband and Sub-Urban Broadband networks. Meanwhile, we are currently in the midst of reviewing our recommendations and forecasts on Axiata and Digi following the recent completion of the merger.
• Environment, social, governance (ESG). Local telcos have minimal ESG issues with low carbon footprints on the environment given the nature of operations. Furthermore, they are actively involved in corporate social responsibility projects While Maintaining Good Corporate Governance Practices.

Source: AmInvest Research - 20 Dec 2022