Highlights

• As a sequel, Communication and Multimedia Minister Datuk Seri Ahmad Shabery Cheek announced that consumers will enjoy cheaper basic broadband packages for mobile and fixed services with a reduction in of between 10% and 57% in the next 2 months.

• Mobile packages would be offered at RM25 for subscribers who subscribed to a monthly data quota of 1GB and 3GHSPA for both prepaid and postpaid services.

• For fixed services, TM will be offering basic broadband at RM38 (57% reduction of current’s RM88) a month for 1Mbps with 1GB data quota. Similarly, TdC will match TM’s offer.

• New mobile basic broadband packages will be available in a month’s time while t he fixed package by TM is expected to be available from mid-June, as it needs some adjustment period.

Comments

• Although we have highlighted this repeatedly (kindly refer to our sector reports entitled “2015 Outlook” dat ed 19 January 2015 and “Doubl e Whammy” dated 6 April 2015), the quantum of the data tariff reduction was a negative surprise, especially for fixed broadband.

• With lower price barrier, we expect stronger net adds and traffic volume to partly offset the cut in prices. Moreover, the delayed GST boost coming in June will also cushion the impact. Previously, we estimated DiGi, Maxis and Axiata to see earnings uplift of 4.7%, 3.9% and 3.2%, respectively, provided usage and competition remain status quo.

• Amongst the cellcos, we expect DiGi to be least impacted due small differentials compared to its existing data pricing. This is followed by Axiata (Celcom’s contribution is only 50% to the group) and Maxis.

• As for fixed players, TM will be impacted the most as internet is the largest revenue contributor to its retail segment at circa 34.9% and 26.1% to the group. While, TdC’s retail segment is estimated to contribute less than 5% to the group sales. D&A for equipment and installation costs will lengthen ROI.

• Potential cannibalizations as subs with expired contracts downgrade their packages to better suit their need with price.

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 aft er 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 - 16 Apr 2015