Life After An Impairment Tsunami

With a combined net loss of RM1.6bn, 2018 was one of the worst years for the Malaysian telco sector, partly attributable to large asset impairments. Operationally, stagnation in subscribers and stiff competition has eroded cellcos’ profit margins while regulatory changes and competition affected TM’s profitability. Moving into 2019, most companies (except Maxis) are expecting higher EBITDA / EBIT. The capex outlook is mixed; Maxis has a higher allocation while TM plans to spend less. All in, we are Neutral on the sector. Competition and regulatory risks should cap sector earnings growth, but these negatives are partly priced-in. Digi (HOLD) is our relative preferred pick for its stable earnings and 4.5% yield.

The Smaller Players Continue to Gain Market Share

The number of subscribers for Malaysia’s cellular services grew by a meagre 0.1% in 2018 to 42.4m. All the big three cellular providers (Celcom, Maxis, Digi) saw declines in the number of subscribers - Celcom had the largest decline of 4.9% yoy; the others (U-Mobile, TM, MNVOs) recorded a 8.2% gain in subs and grew their market share to 25.4% (from 23.5% in 2017). In the fixed broadband market, TM also saw a decline in subscribers and market share.

Lower Margin + Impairments = Disappointing 2018 Earnings

In addition to the competition from the smaller players, the telcos also endured (and are still facing) a number of challenges, such as: (i) regulatory changes (albeit subsiding); (ii) technology shifts (resulting in impairments and high capex); and (iii) macro headwinds (higher finance costs and taxation for Axiata’s overseas operations). Operationally, the telcos are undertaking various measures to control costs (i.e., efficiency improvements via digitisation, rationalising staff costs, lowering sales and marketing); these measures should help cushion the impact of external issues but are unlikely to lift profit margins.

Most Companies Expect Higher 2019 EBITDA / EBIT

Moving into 2019, three of the four telcos (except Maxis) are expecting growth in operating profit, driven by better cost controls and margin improvement. The capex outlook is mixed: Maxis has allocated a higher budget for expansion into new segments while TM is expecting lower spending.

Maintain Sector Neutral Call; Digi (HOLD) Is Our Top Pick for Yield

Overall, we are neutral on the Telco sector. The competition in the cellular market is stiff, but not irrational, while the regulatory pressures have somewhat subsidised. Importantly, the telcos’ share prices have partly priced-in the challenging business environment. For exposure, we like Digi (HOLD) for its 4.5% yield; we have recently upgraded TM to HOLD (from Sell) in view of its improving cost control and low decline in broadband ARPU. Axiata also remains a Hold. Maxis remains a SELL for its rich valuation and declining EPS.

Source: Affin Hwang Research - 11 Mar 2019