Investment Highlights

• No easing in mobile data pricing intensity. U Mobile has just launched its unlimited mobile internet with speeds of up to 5Mbps, 5GB tethering and free voice calls for only RM50/month under its GX50 postpaid plan. Additionally, U Mobile also offers unlimited internet at RM30/month with speeds of up to 3Mbps and 3GB tethering but charges voice calls on base plans. This follows unifi Mobile’s promotional free Bebas plan (vs. retail price of RM10 per SIM card) which offers 10GB of free LTE data until 30 June this year. Digi meanwhile has its Infinite plan starting at RM100/month for unlimited data and calls with 20GB of tethering. Digi’s Infinite 150 offerings unlimited tethering data. 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. 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.

• Still no respite from mobile subscriber contraction amid tight competition and ongoing SIM consolidation, declining QoQ by 152K to 32mil primarily in the prepaid segment. 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 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.

• 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 average revenue per user (ARPU). Communications and Multimedia Minister Gobind Singh Deo recently said that fixed broadband prices are expected to drop at least by 25% by year-end; though we expect TM mitigate the impact by offering new permutations at higher speeds while limiting price cuts. Currently, TM's lowest Unifi monthly package of RM129 for speed of 10Mbps translates to RM12.90/Mbps, 8.7x compared to Time dotCom's RM1.49/Mbps (RM149 at 100Mbps).

• Rising need for consolidation. As U Mobile and unifi Mobile wrestle for new customers on the unlimited mobile data arena, we do not discount the possibility of sector earnings cuts if incumbents up 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. Main synergistic benefits from an Axiata-TM merger are the complementary suite of services which Axiata's mobile services that 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.

• Sector can be derated on resumption of revenue declines given the tight competition amid a decreasing subscriber base. Besides the existing mobile wars, the fixed broadband segment under TM’s unifi, Maxis’ Home Fibre and Time dotCom faces daunting prospects of declining ARPUs amid the government’s plans to develop a data-intensive socio-economy.

• Sector upgrades only if prospects for stronger topline momentum materialise. A sector re-rating requires catalysts for stronger revenue growth prospects demonstrated in subscriber, ARPU and margin expansions. As the global landscape for rapid data trajectory is driven by lower price plans and increasingly expensive capex rollouts to provide wider fixed broadband and 4G capabilities, coverage and service quality, any significant organic revenue or margin growth improvement is unlikely over the next 12 months.

• Maintain NEUTRAL call given the continued intense competition in both the mobile and fixed broadband markets. 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 - 28 Jun 2018