Investment Highlights

• Mixed 1Q2018 performance. The telco sector’s 1Q2018 results were mixed as Digi, Maxis and Time dotCom were generally in line amid disappointments from TM and Axiata. TM was dented by lower voice and data revenues, lower universal service provider revenue, government/enterprise projects and the absence of submarine connectivity sales involving indefeasible rights of use. Axiata was affected by the stronger ringgit on overseas contributions, one-off Celcom network expenses and adverse prepaid registration campaign on XL’s subscriber growth. Nevertheless, the cellular telecommunications (celco) sector’s normalised net profit rose 4% QoQ due to the mildly positive impact of MFRS 15 on postpaid device revenue, dealers’ commissions and amortisation, especially for Maxis and Digi.

• Total subscribers continued to contract amid tight competition and ongoing SIM consolidation, declining QoQ by 152K to 32mil. However, the bulk of the QoQ decline stems from Maxis, which lost 214K, as it focused on higher value postpaid customers, while Celcom gained 51K and Digi 11K. Key highlight was Celcom’s return to an accretive subscriber trajectory, after declining for 9 consecutive quarters.

• Growing postpaid segment insufficient to offset service revenue decline. While the prepaid subscriber base continued to dwindle, the higher value postpaid segment grew 159K (+2%) QoQ and 371K (+5%) YoY. However, this was insufficient to offset the average decline of 70 sen/month in blended average revenue per user (ARPU) to RM47/month. Despite the mild MFRS 15 boost, this led to a service revenue decline of 4% QoQ to RM5.5bil.

• Maxis remains revenue leader despite Digi’s larger subscriber base. Digi pulled further ahead with its top subscriber market share at 37% vs. Maxis’ 33% 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 21% and 15% respectively higher than Digi’s. This places Maxis in the leading position for sector revenue with a market share of 40% vs. 30% for both Celcom and Digi.

• MFRS 15 boost to EBITDA margin. 1QFY18 EBITDA margin rose 4.6ppts to 45.4% due to the impact of MFRS 15, together with lower operational costs as marketing expenses were generally higher in 4QFY17. 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 unifi Mobile’s promotional free Bebas plan (vs. retail price of RM10 per SIM card) which offers 10GB of LTE data until 30 June this year. We note that this competes head on with U Mobile’s Hero P79 plan, which offers 20GB data for RM79/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.

• Declining fixed broadband ARPUs. The new Pakatan government’s manifesto reiterates the previous Barisan Nasional administration’s intention of doubling fixed broadband speed and halving its prices within 2 years, contributing to TM’s declining unifi ARPU. For its existing customers, Maxis has lowered 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 UniFi 10Mbps is now priced at RM129/month although Time dotCom still offers the best value for money with 100Mbps at RM149/month.

• Rising need for consolidation. As U Mobile and unifi Mobile wrestle for new customers on the unlimited mobile data arena, we remain convinced that sector consolidation is still 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.

• 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 fair value for TM has been cut to RM5.30 from RM6.20 due to its declining broadband ARPU prospects. Nevertheless, 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 Jun 2018