Investment Highlights

• 2Q2017 results were in line. The telco sector’s 2Q2017 results were largely in line even though Digi came in below expectations amidst a lowered service revenue guidance. Axiata’s results, which were boosted by one-off deferred tax writebacks in Bangladesh and transfer gains from Celcom’s associate, were largely in line with our forecast. While Maxis’ results were also strong despite a further contraction in subscriber base, we expect subsequent quarters to be weaker due to lower data roaming revenues in tandem with the termination of Maxis’ 3G radio access network arrangement with U Mobile. TM appeared to be above expectations compared with the trend of the past 3 years but we view the results as within our forecast given the likelihood of higher depreciation and operating charges in the second half of the year. Similarly, Time DotCom’s results were in line with previous trends but management is guiding for a weaker 2H2017 which led to lowered earnings expectations.

• Digi’s subscriber base nudges back to pole position as the other two player slid. In a neck-and-neck race, Digi has now surpassed Maxis’ subscriber base by 369K to 12mil, driven by competitive pricing and innovative packages for the low-mid income group, as the overall sector lost 210K subscribers. Celcom, which lost 317K customers, was the worst performer while Maxis shed 147K due to loss from the prepaid segment with the closure of inactive accounts. Excluding U Mobile, Digi’s market share is currently at 36%, Maxis 35% and Celcom 29%.

• Revenue flat despite subscriber contraction. The celco sector’s 2Q2017 revenues was flat QoQ at RM5.3bil, driven largely by a RM1/month increase in blended average revenue per user (ARPU) to RM47.70/month, which mitigated the subscriber loss. The ARPU improvement stemmed largely from the closure of inactive accounts and some migration to higher priced postpaid plans from the prepaid segment. With a strong focus towards cost efficiencies, cellular operators’ (celco) 2Q2017 EBITDA margins rose 0.5ppt QoQ to 44.8%.

• Tight competition with declining subscribers. Competition in the mobile segment remains intense, as total subscribers fell by 3.9mil or 11% since 1Q2013, wholly due to the decline in the prepaid segment. Celcom accounted for 56% of the subscriber loss and the rest from Maxis, while Digi has managed to increase by 16%.

• Persistent pricing intensity. In our view, near-to-medium-term earnings catalysts appear weak given the likelihood of further intensification in the celco wars with Digi still offering unlimited internet quota for its RM158/month package while U Mobile appears to have the best unlimited data option yet at RM78/month with free data roaming. webe’s offer of unlimited data costs RM79/month.

• 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, such as U Mobile’s unlimited data plan. 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.

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

Source: AmInvest Research - 7 Sept 2017