Investment Highlights

• 4Q2017 largely in line on flat revenue. The telco sector’s 4Q2017 results were largely in line on a flat revenue increase of 1%, with the exception of Axiata’ outperformance from Celcom’s improving service revenue trajectory. Overall, the cellular telecommunications (celco) sector’s normalised net profit slid 3% QoQ from Digi’s fair value-adjusted interest charges and one-off settlement costs for IT services

• Prepaid decline continues unabated, given the tight competition amid a decreasing subscriber base. Competition in the mobile segment remains intense, as total subscribers fell by 2.4mil or 7% YoY, almost wholly from the prepaid segment. 43% of the loss came from Celcom and 34% from Maxis and the balance from Digi.

• Growing postpaid segment, which drives improving ARPU. Notwithstanding the decline in the prepaid segment, the higher value postpaid segment has grown 89K (+1%) QoQ and 379K (+5%) YoY, driving up the average revenue per user (ARPU) by RM1.33/month QoQ and RM2.67/month YoY to RM50/month. This has enabled the sector to deliver a tepid service revenue growth against the backdrop of a dwindling subscriber base besieged by persistent competition amidst SIM consolidation in a matured market.

• Maxis remains revenue leader despite Celcom’s larger subscriber base. Digi retained its top subscriber market share at 36.5% ahead of Maxis’ 33.9% while Celcom remained a distant third at 30%. Digi’s pole position since 1Q2016 stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. However, Maxis is stronger in the postpaid segment with an ARPU and subscriber base which are 32% and 3% respectively higher than Digi’s. This places Maxis in the leading position for sector revenue with a market share of 39% vs. Celcom’s 31% and Digi’s 30%.

• Flat EBITDA margin as the sector has largely managed to contain costs despite a flat revenue trajectory. However, rising depreciation costs on LTE network expansion and additional spectrum fee charges with the upcoming 2100MHz and 700MHz bands could further dampen net profit momentum.

• No easing in mobile data pricing intensity. We expect further repackaging formulations by the industry against the backdrop of U Mobile’s Hero P78 plan, which offers unlimited data with speeds up to 5Mbps for RM78/month and P99 for unlimited data with no speed caps at RM99/month. In our view, near- to medium-term revenue growth outlook remains weak given the likelihood of further intensification in the mobile wars, with Digi and Celcom likely to raise the ante against both U Mobile’s plan and unifi mobile’s unlimited mobile data/voice/SMS pricing plans, currently priced at RM79/month for the first SIM, RM69/month-RM49/month for second to fourth SIM. As U Mobile and unifi mobile wrestle for new customers on the unlimited mobile data arena, prospects will deteriorate for incremental service revenue accretions in the sector.

• Competition now escalates on 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 one of its limited time offers. As a comparison, Telekom Malaysia’s 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 2017 Budget announcement in 2016, 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 this year.

• Rising need for consolidation. As U Mobile and webe wrestle for new customers on the unlimited mobile data arena, we remain convinced that sector consolidation remains the logical route, which is likely to be spearheaded by the potential remerger of Axiata and TM. 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 celco 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 possibility 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 - 6 Mar 2018