Investment Highlights

• Maintain NEUTRAL call given the continued intense competition in the cellular telecommunications (celco) segment with HOLD recommendations on Maxis and Digi. We have BUYs on Axiata and TM due to the game-changing merger likelihood which will significantly enhance their earnings and market share trajectory.

• 1Q2017 largely in line despite lower revenue. The telco sector’s 1Q2017 results were largely in line with the exception of Axiata, as Celcom was still struggling to turn around its prepaid subscriber decline. In fact, all 3 celcos experienced a continued decline in subscriber base, accentuated by the prepaid segment, together with a 3% sequential decline in sector revenue. However, Maxis registered lower depreciation while Digi bore lower effective tax rates, which enabled them to deliver in-line earnings. TM was also in line as its lower revenue was offset by decreased operating costs.

• Maxis’ subscriber base nudges back to pole position. Since losing out to Digi as the largest mobile subscriber base in 1Q2016, Maxis has nudged back ahead with 11.8mil users, just 32K ahead of Digi. This came largely from Maxis’ slower rate of subscriber contraction vs. its peers. Currently, Maxis has a market share of 34.6%, Digi 34.5% and Celcom 30.9%.

• Revenue down on subscriber contraction. The celco sector’s revenues declined 3% QoQ to RM5.3bil, driven largely by a 1.2mil decrease in subscriber base to 34mil while blended average revenue per user (ARPU) slipped slightly to 47 sen. The prepaid segment accounts for 85% of the subscriber contraction, partly due to the clearing of dormant accounts.

• Tight competition with declining subscribers. Competition in the mobile segment remains intense, as total subscribers fell by 3.2mil since 1Q2014, of which 89% stemmed from the prepaid segment. Celcom accounted for 61% of the subscriber loss, Maxis 28% and the rest from Digi. Average revenue per user was relatively resilient since 1Q2016 but upside growth is constrained by the price-sensitive market.

• Persistent pricing intensity. Following U Mobile’s recent P38 plan, which offers unlimited voice calls to all networks and 4GB data at RM38/month, Digi has introduced a postpaid plan with unlimited voice at a price of RM50/month. In our view, near- to medium-term earnings catalysts appear weak given the likelihood of further intensification in the celco wars with U Mobile and Digi raising the ante against Webe’s unlimited mobile data/voice/SMS pricing plans, priced at RM79/month for the first SIM, RM69/month-RM49/month for second to fourth SIM.

• Time dotCom away from celco wars. Currently, the only telco mostly shielded from this disastrous competition is Time dotCom with its fibre broadband strategically positioned with backhaul, enterprise and retail services to support rapidly expanding data demand. Together with a boost from irregular sales of the Asia Pacific Gateway submarine cable and Cross Peninsular cable systems, Time dotCom’s 1Q2017 revenue surged 25% YoY, which propelled its adjusted pre-tax profit by 32% YoY.

• Rising need for consolidation. As TM continues to promote its relaunched webe service, albeit with a small estimated subscriber base currently, we do not discount the possibility of sector earnings cuts if incumbents further exacerbate the already intense competition for market share. Hence, we remain convinced that sector consolidation is impending, which is likely to be spearheaded by the re-merger of Axiata and TM. This will fundamentally reshape dynamics in customer convenience, unified services, marketing convergence and more significantly, cost savings.

Source: AmInvest Research - 2 Jun 2017