• Results were mixed in 1Q. Axiata and Digi came in below expectation, TM and TIMEdotCom (TIME) were inline while Maxis above.

• ARPU remained stable while smartphone penetration is on the rise.

• We downgraded Axiata and Digi’s earnings while made no changes to Maxis, TM and TIME.

• We reaffirm our NEUTRAL recommendation on the sector. TIME remained our top pick of the telcos with an unchanged target price of RM10.00.

Mixed results in 1Q, expect ARPU trend to remain stagnant.

First quarter earnings for telcos were mixed for Malaysian telcos. Axiata’s earnings was below expectation, affected by higher depreciation and amortisation charges. Digi’s performance was also below forecast due to higher-than-expected interest expenses and depreciation charges. Meanwhile, Maxis’ earnings came in above our estimates, while TM and TIME were generally in-line. Overall, 1Q17 saw stable EBITDA margin despite cost pressure, particularly involving network cost and staff expenses. Axiata, Digi, TM and TIME all reported positive EBITDA growth as these companies imposed stricter cost control across the board. Overall ARPU for mobile operators were relatively stable during 1Q. In terms of blended ARPU, Digi has the lowest ARPU with RM40 as at 1Q17 – a decline of 4.7% yoy. Meanwhile, Celcom and Maxis saw ARPU growth of 10.2% and 3.6% respectively to RM43 and RM57 respectively (Figure 2). In near to mid term we; believe the price war in mobile segment should take a break as telco providers are now offering higher internet data instead of competing with lower monthly charges . We reckon telcos will continue to invest heavily in CAPEX in order to meet data demand and expand their 4G coverage.

Earnings revised downwards – Sector remains Neutral.

We downgraded Axiata’s FY17 and FY18 earnings forecasts downwards by 10.3% and 10.7% respectively to RM1,291m and RM1,297m respectively. For Digi, we revised our FY17 and FY18 net earnings forecast downwards to RM1,702m (-1.8%) and RM1,817m (-1.3%) respectively. Meanwhile, we made no changes to Maxis, TM and TIME’s numbers. We maintain NEUTRAL on the telco sector as we do not foresee excitement in earnings in the near future. Nonetheless, fixed-line subscribers and ARPU are still growing steadily, driven by expansion in coverage and increasing demand. Our top pick of the sector is TIMEdotCom (TP: RM10.00) given its double-digit earnings growth in the next 3 years, ahead of all other listed telcos. We maintain our BUY recommendation on TM (TP: RM7.50) and Digi (TP: RM5.65) while HOLD on Axiata (TP: RM4.35) and Maxis (TP: RM5.90).

Axiata – earnings impacted by higher depreciation

Axiata’s 1QFY17 normalised PATMI of RM291m is below our expectation, making up 20% of our full year forecast. Despite a decent 1Q17 revenue growth of 17.4% yoy, Axiata’s normalised PATMI fell by 37.3% due to higher accelerated depreciation in Malaysia, Indonesia and Bangladesh (+RM352.9m or 30.3% higher yoy for the group); amortisation of intangibles assets arising from acquisition of Nepal operation; and share of losses from associates & JV (loss of RM30.5m vs profit of RM69.5m yoy). Subscribers for Celcom fell by 10.2% yoy to 10.2m at the end of March 2017. Celcom’s revenue fell 3.4% yoy mainly due to falling subscribers (-15.2% to 10.2m). As a result, net earnings fell by 33.4% to RM191m, compounded further by higher network costs (+20%); accelerated depreciation charges and lower share of profit from associate and JV. On qoq basis, prepaid ARPU fell slightly from RM31 to RM30 (yoy: RM29), while postpaid ARPU saw a slight improvement, from RM80 to RM81. We revised our FY17 and FY18 earnings forecasts downwards to RM1,291m (-10.3%) and RM1,297m (-10.7%) respectively by factoring higher depreciation charges and lower income from associate & JV.

Digi – higher interest expenses dragged down 1Q earnings.

Digi’s 1Q17 net earnings of RM373m is slightly below our expectation, making up 22% of our full year forecast. Revenue declined by 4.8% yoy as prepaid subscribers fell by 8%. Net earnings fell by 6.5% as a result of higher and interest expenses (+60%). Nonetheless, data revenue surged 8.7% yoy to RM751m in contributed by higher internet usage as a result of stronger data network. Prepaid subscribers fell by 8% while prepaid ARPU dropped to RM32 (1Q16: RM35; 4Q16: RM34). The fall in prepaid ARPU was mainly due to intense competition in the segment. Postpaid ARPU was flat at RM79 vs. the previous corresponding period of RM80. We revised our FY17 and FY18 net earnings forecast downwards to RM1,702m (-1.8%) and RM1,817m (-1.3%) respectively by factoring higher depreciation charges and interest expenses. Meanwhile, DiGi declared its first interim dividend of 4.8sen per share (100% payout).

Maxis – stronger earnings and stable ARPU.

Maxis’ earnings came in above our expectation, making up 27% of our full year forecast. Net profit grew by 5.4% to RM510m, mainly due to lower taxation at 25.4% vs. yoy’s 29.2% (reversal of deferred taxation amounting to RM49m). Postpaid ARPU maintained at RM102 (1Q16: RM102; 4Q16: RM104) while prepaid ARPU was slightly higher at RM42 vs. yoy’s RM39 and qoq’s RM42. Correspondingly, blended ARPU was higher at RM57 as compared to 1Q16’s RM55; and 4Q16’s RM57. We do not expect surprise in earnings in coming quarter, hence, maintained our FY17 and FY18 net earnings forecasts at RM1,864m and RM1,915m respectively.

TM – driven by strong internet revenue.

TM’s 1QFY17 normalised PATMI of RM229.8m is within our expectation, making up 25% of our full year forecast. 1Q revenue grew by 3.8% to RM3,002.6m yoy, driven by stronger internet revenue (+8.4%) while normalised PATMI surged 13.2% to RM229.8m mainly on lower taxation (-22.8%). Internet services remained as the key growth driver for TM with solid revenue growth of 8.4% yoy to RM969m driven by higher UniFi customers. Total broadband customer base increased to 2.37m, up 0.3% yoy, with UniFi continuing to see a strong growth of 11.6% yoy with 979,000 customers activated (Figure 5). ARPU for UniFi and streamyx remained on uptrend with a growth of 4.7% and 1.1% yoy respectively to RM201 and RM89 respectively. We maintained our FY17 and FY18 net earnings forecast at RM904m and RM942m respectively.

TIME – robust earnings growth outlook intact.

TIME’s 1Q earnings rose 31.3% yoy to RM55.5m, inine with our forecast. The strong earnings were driven by strong growth in all core divisions, i.e. (i) data (+29.0%); (ii) data centre (+19.7%); and (iii) voice (+4.0%). EBITDA margin was higher at 36.5% vs. previous year’s 32.8% mainly due to tight cost management and stronger high-margin Indefeasible Rights of Use (IRU) sales (+13%). TIME is also eagerly anticipating the completion and operational commencement of the Asia-AfricaEurope-1 (AAE-1) subsea cable system in 2017, which will extend its network reach to Europe to open new markets and opportunities for the Group. We believe the increasing global demand internet data and new subsea cable coming on-stream will provide greater earnings potential and visibility for TIME. We believe the only telco mostly shielded from price and data competition is TIME with its fibre broadband strategically positioned with backhaul, enterprise and retail services to support rapidly expanding data demand. We leave our FY17 and FY18 net earnings forecast at RM212.2m and RM239.7m respectively, representing growth of 11.4% and 12.9% respectively.

Outlook for short to mid-term

Total subscribers for the 3 mobile companies (Figure 3) fell by 8.9% yoy to 32.4m. Celcom posted the largest decline, at -15.1%, followed by Digi with -7.0% and Maxis at -4.4%. We believe the balance of the market was taken up by small players such as U Mobile, Tune Talk, XoX etc. With the falling subscribers and stagnant ARPU in mobile telcos, we believe earnings visibility in the near future to remain gloomy.

Accelerating uptake of mobile internet services from a larger mix of smartphone users now accounts for one-third of total customer base. According to the latest industry data, smartphones penetration are now at least 70%, representing a yoy growth of 10% (Figure 4). We believe the number shall continue to grow given the more affordability of smartphones and attractive mobile plans; thus, mobile revenue will be the key growth driver for mobile telcos. The unrelenting growth in utilisation and mobile data traffic would continue to deliver strong revenue opportunities to mobile operators.

Maintain our Neutral view on Telco sector.

In view of the falling mobile subscribers while ARPU remained stagnant, we remained NEUTRAL on the telco sector. Nonetheless, we like fixed-line providers for their growing subscriber base driven by expansion in coverage and increasing demand while ARPU remained stable. Our top pick of the sector is TIMEdotCom (TP: RM10.00) given with its fibre broadband strategically positioned with backhaul, enterprise and retail services to support rapidly expanding data demand while its earnings will remain to grow double-digit for the next 3 years, ahead of all other listed telcos. We maintain our BUY recommendation on TM (TP: RM7.50) and Digi (TP: RM5.65) while HOLD on Axiata (TP: RM4.35) and Maxis (TP: RM5.90).

Source: BIMB Securities Research - 9 Jun 2017