Investment Highlights

• 4QCY22 results exceed expectations. Out of 4 companies under our coverage, 3 outperformed street’s expectations and 1 underperformed. Axiata Group’s (Axiata) (HOLD, FV: RM3.40) results beat expectations mainly attributable to stronger Celcom contribution. CelcomDigi (formerly known as DiGi.com) (HOLD, FV: RM4.40) reported above-expected earnings on the back of robust revenue growth following the consolidation of a 1-month contribution from Celcom as well as the healthy underlying performance of the Digi brand. Also, Telekom Malaysia (TM) (BUY, FV: RM6.70) outperformed, thanks to higher revenue from unifi and TM Global divisions, coupled with better-controlled spending. Conversely, Maxis’ (HOLD, FV: RM3.90) results came out below expectations due to higher-than-expected device costs from a good take-up rate for its bundled-packages.

• The sector’s December quarter core earnings expanded 33% YoY, with all telcos, except for Maxis, reporting positive core PATAMI growth. This is supported by an 8% YoY growth in aggregate sector revenue. Notably, despite recording a lower revenue (-6% YoY) during the quarter, TM’s core earnings surged 89% due to lower opex driven by its cost optimisation initiatives. QoQ, the sector’s PATAMI grew 42% despite a 6% dip in revenue.

• No change in earnings forecasts. Despite robust earnings, we maintain TM’s estimates, taking a conservative view following the uncertainties of the mandatory standard access pricing impact. Meanwhile, Maxis’ high device costs during the quarter will not affect the group’s future earnings.

• Industry’s underlying growth remains healthy. Operationally, the country’s top 3 mobile network carriers (Maxis, Celcom and Digi) recorded a cumulative net subscriber increase of 200k sequentially during the quarter with growth in Maxis (+72K QoQ) and Digi (+272K QoQ), partly offset by the decline in Celcom (-144K QoQ). Compared to the same period last year, total net subscribers increased by 431K with Digi being the biggest gainer (+665K YoY). Meanwhile, the industry’s average revenue per user nudged upwards to RM44.9/month (vs. RM44.3/month in 3QCY22 and RM44.3/month in 4QCY21).

• We are forecasting aggregate revenue growth of 14% in 2023F for stocks under our universe, mainly driven by the recovery of Axiata’s emerging and frontier market sales after the multiyear challenge of the Covid-19 pandemic and macroeconomic headwinds. CelcomDigi revenue is expected to almost double following the full-year contribution of Celcom. However, our aggregate core PATAMI forecast assumes a slower growth of 9% despite the absence of the prosperity tax, given that telcos that have signed access agreements with Digital Nasional (DNB) will be recognising their maiden fixed wholesale capacity charges.

• Maintain NEUTRAL outlook on the sector as the higher opex from DNB’s fixed 5G annual wholesale capacity charge on telcos could more than offset escalated data demand and easing competition from the consolidation Celcom and Digi amid a slower economic growth outlook which could depress subscribers’ affordability.
  Reiterate our BUY call for TM 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. Additionally, the company will benefit from the leveling of the mobile business playing field following the 5G Single Wholesale Network roll out structure.

Source: AmInvest Research - 9 Mar 2023