- The recent FY14 earnings season for the telco sector saw mixed results, but generally reflects the struggle in monetising data despite the already steep fall in traditional voice and SMS revenues. Of the telcos we cover, Axiata underperformed, Digi and Maxis were in line, while TM outperformed our expectation. However, earnings for TM, Maxis and Axiata were cut due to weaker-than-expected FY15F guidance and wider-than-expected losses from P1 (for TM). Our aggregate sector FY15F/16F earnings were reduced by 12%/10% post result season.

- FY15F revenue growth guidance of low-single digit and flat to low-single digit EBITDA growth were quite disappointing, given:- (1) fairly good development of LTE networks, which reached 32%-33% pop coverage as at end-FY14 and targeted to reach circa 50% by end-FY15F (for Maxis and Digi); and (2) GST impact kicking in which should benefit celcos as they can pass on the current prepaid tax. Most celcos however guided for some weakness in 1Q15 arising from the carryover impact of the recent floods in the East Coast, in particular, the distribution channels that were impacted badly.

- Industry subs growth reaccelerated: 4Q14 saw industry total subs growth reaccelerate to +1.5% YoY after having stalled in the prior three quarters (see Exhibit 3 & 4). Both Maxis and Digi drove the growth but Celcom saw a contraction (-1.3% YoY) given the delay in the completion of its IT revamp, little impact from refreshed plans in 4Q14 and the initial impact from the East Coast floods where Celcom is a major player. As a result, there was a small shift in subs share; Maxis gained (1ppt) at the expense of Celcom – both players’ subs share now stand at 35%, while Digi’s is unchanged at 31%.

- Mobile revenue momentum bottoming: The YoY contraction in mobile revenue growth seen through most of FY14, narrowed in 4Q14 (at -0.4% YoY, vs. -1.6% YTD) driven by stronger data revenue growth despite a deepening in voice revenue contraction. Maxis and Celcom saw their revenue contraction narrow while Digi’s revenue growth gained strength (see Exhibit 5). Digi was the only player to see its data revenue growth sufficiently offset the fall in voice/SMS throughout the year. Revenue share among the incumbent telcos remained unchanged in 4Q14 (vs. 3Q14) but on a YTD basis, Digi gained at the expense of Maxis and Celcom. Total industry mobile revenues contracted 1.6% in FY14 – data revenue growth of 7% was more than offset by an 8% decline in voice revenues. Players have been guiding for minor, but nonetheless, positive growth in mobile revenues this year, likely to be driven by improved data uptake.

- The margin trade-off: The industry’s gain in subs growth in recent quarters came at the expense of margins (see Exhibit 7) and subs growth, in turn, was the key driver of the improved revenue momentum (see Exhibit 8 & 9) rather than ARPU. Maxis and Digi (both drove industry net adds) saw margin deterioration on a QoQ basis, while Celcom saw small improvement (but registered net churn). In fact, Maxis’ operational parameters (i.e. ARPU, subs base, mobile revenue) gained traction in 4Q14, but it did not translate into actual earnings improvement. After resolving its IT issues in 1Q15, Celcom is positioned to launch new tactical plans to regain its revenue share. We think competitive intensity will sustain in FY15 as Celcom makes a comeback, underpinned by higher capex spend in FY15F, while smaller players still remain aggressive. TM’s entry into the mobile space in FY15 also adds to the competitive intensity in the near-term.

- We remain NEUTRAL on telcos: Axiata (BUY, FV: RM7.90/share) is our top sector pick for:- (1) a turnaround in Celcom performance in FY15F having resolved its network issues and is at the tail end of its IT revamp; (2) a structurally improved XL from 2H15 once it is through its transition to a value driven business model; and (3) best potential for a dividend surprise – low net debt to EBITDA of 1.2x vs. ceiling of 2.5x, one of the better positioned GLCs to increase dividend upflow to Khazanah.

Source: AmeSecurities Research - 16 Apr 2015