Highlights

• Being the only commercial sector that would benefit from GST, 1st April was very much looked forward to by the telcos. Instead, they were slapped by two anticlimax events: 1. Due to heavier burden as a result of GST, telcos have agreed to a transitional measure whereby all prepaid subscribers who reload RM5 and above a value which is higher than the GST addition will be given free airtime minutes and SMS. For example, subscriber will get 5 voice minutes and 5 SMS for every top up of RM10. While for reloads of RM20, the subscriber wil receive 10 voice minutes and 10 SMS. This will apply for 3 months, starting 3rd April 2015; and 2. After the pre-launch of the Content Malaysia Pitching Centre, Communications and Multimedia Minister Datuk Seri Ahmad Shabery Cheek announced that telcos have agreed to reduce broadband service charges by at least 6% to encourage greater internet usage among the people. The decision was arrived at following series of discussion with the telcos and the matter would be officially announced in a month’s time.

Comments

• Both events were not a surprise as they were highlighted and addressed in our sector report entitled “2015 Outlook” dated 19 January 2015.

• With the GST boost adjourned by a quarter, DiGi is expected to enjoy the most with 4.7% (previously 7.0%) in earnings uplift, followed by Maxis and Axiata with 3.9% and 3.2% (previously 5.8% and 4.9%) respectively, provided usage and competition remain status quo.

• Telcos continue support to regulator’s call to lower broadband pricing. However, this happens earlier than our expectations of being enforced in tandem with access pricing revision, which will take place by end of FY15. We will assess the impact when more details are revealed.

Catalysts

• Cost savings from partnerships.

• Managed services / outsourcing.

• Increased demand for wholesale bandwidth.

Risks

• Irrational competition, regulation of tariffs, FOREX.

Forecasts

• Maintained.

Rating

• Neutral

Positives

• Low beta, defensive, strong cash-generation and dividends should underpin the share prices.

Negatives

• Potential irrational competition, regulatory risks, unable to monetize data and dumb pipes.

Top Picks

• Axiata (BUY, TP: RM7.52) - Celcom’s recovery after prolonged IT transformation, full integration of XL-Axis and strong growth of OpCos in emerging markets.
• TdC (BUY, TP: RM6.13) – 4G LTE rollouts will continue to boost demand for node fiberization and exposure to regional data boom benefiting both global bandwidth sales and data centre businesses.

Source: Hong Leong Investment Bank Research - 6 Apr 2015