Investment Highlights

• 3Q2017 largely in line despite lower revenue. The telco sector’s 3Q2017 results were largely in line except for Maxis’ outperformance due to the delayed impact of the termination of Maxis' 3G radio access network arrangement with U Mobile in FY18F, instead of earlier expectations of a progressive revenue decline beginning in June this year.

• Prepaid decline continues unabated, given the tight competition amid a shrinking subscriber base. Competition in the mobile segment remains intense, as total subscribers has fallen by 3.5mil or 12% since 1Q2014, almost wholly from the prepaid segment. 73% of the loss came from Celcom and the balance from Maxis as Digi managed to recover some lost ground. Average revenue per user (ARPU) was relatively resilient since 1Q2016 but upside growth is restricted by the pricesensitive market.

• Digi’ subscriber base remains the leader. Digi retained its top subscriber market share at 36%, ahead of Maxis’ 34% while Celcom remained a distant third at 29%. Digi’s pole position stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. As such, Digi’s revenue market share is only 29% vs. Maxis’ 41% and Celcom’s 30%.

• Revenue up slightly on postpaid accretion and ARPU improvement. The celco sector’s revenues rose 1% QoQ to RM5.4bil driven largely by a 57mil increase in postpaid subscribers and RM1/month increase in blended average revenue per user (ARPU) to 49 sen. This drove sector EBITDA up by 6% QoQ and 2ppt increase in margin. Together with cost efficiency gains and lower depreciation, sector PATAMI rose 12% QoQ.

• No easing in mobile data pricing intensity… Following U Mobile’s recent P78 plan, which offers unlimited data with speeds up to 5Mbps for RM78/month, it has introduced P99 for unlimited data with no speed caps at RM99/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 TM’s webe’s (soon to be rebranded as UniFi mobile) unlimited mobile data/voice/SMS pricing plans, still priced at RM79/month for the first SIM, RM69/month-RM49/month for second to fourth SIM.

• … while competition grows for fixed broadband. For its existing customers, Maxis is now lowering the price of its home fibre services by RM20/month to RM119/month for its 10Mbps option which offers unlimited voice calls to all mobile and landlines as part of its year-end sales campaign until 31 December 2017. As a comparison, Telekom Malaysia has reintroduced its UniFi 10Mbps at RM129/month although Time dotCom still offers the best value for money with 100Mbps at RM149/month. Recall during the Budget 2017 announcement last year, the prime minister had indicated the government's intentions to double fixed broadband speed and halve its prices within 2 years. Hence, we expect further pricing revisions to this segment next year.

• Declining risks from new spectrum offerings early next year. The huge capex speculated earlier on spectrum costs appear to be declining as the 2600MHz spectrum, used for 4G connectivity, which expires on December this year has been extended to December 2019. Also, we understand that the MCMC may be extending the 2100MHz band, used for 3G deployment under the current spectrum assignment structure, from March 2018 until 2034.

• Rising need for consolidation … As U Mobile and webe wrestle for new customers on the unlimited mobile data arena, we do not discount the possibility of sector earnings cuts if incumbents raise the ante to further exacerbate the already intense competition for market share. Hence, we remain convinced that sector consolidation remains the logical route, which is likely to be spearheaded by the protracted re-merger of Axiata and TM.

• … to fundamentally reshape sector dynamics. Main synergistic benefits from an Axiata-TM merger are the complementary suite of services which Axiata's mobile services can integrate into TM's fixed line operations to draw further mobile market share from the other players Maxis, Digi and U Mobile. However, the more immediate earnings impact from an Axiata-TM merger will be cost efficiencies from the reduction in redundancies for head office expenses, network operating centres, marketing costs and procurement management. Assuming a 10% cost reduction would mean substantial annual savings of RM2.1bil, 3% of the combined group's market capitalisation.

• Maintain NEUTRAL call given the continued intense competition in the cellular telecommunications segment while the fixed broadband segment could face rising pressure from the government to cut tariffs to drive a knowledge and IT-driven economy. Our Top BUYs remain Axiata and TM due to the game-changing merger prospect which will significantly enhance their earnings and market share trajectory while Maxis and Digi are HOLDs due to the resistance in gaining traction in revenue growth amid potential loss in competitive advantage under a re-energised Axiata-TM brand.

Source: AmInvest Research - 4 Dec 2017