• We expect all telcos under our coverage to report lower earnings (qoq) in 4Q20 due to lower mobile service revenue, an uptick in provisions for doubtful debts and recognition of back-loaded expenses
• 2021 is shaping up to be a tough year for mobile operators due to the weak economic recovery and stiff competition. The government’s RM1.5bn telco credits for the B40 group may somewhat mitigate these negatives, but are unlikely to lift the sector’s service revenue, we believe
• We continue to prefer the fixed broadband player to mobile operators. We raised our earnings forecasts and TP for TM to RM6.75 after incorporating higher growth in Unifi subscribers, taking into consideration the strong underlying demand and TM’s effective marketing campaigns

Sequentially, We Expect All Telcos to Report Lower Earnings in 4Q20

The reimplementation of the CMCO in Nov20 and rising Covid-19 cases during 4Q20 had, in our view, affected the country’s economic activities and consumer confidence, leading to a sequential decline in 4Q mobile service revenue. On the other hand, the demand for fixed broadband has grown during 9M20 due to an increase in workfrom-home / remote study arrangements; we expect this trend to continue into 4Q20/2021. For 4Q20, we expect all telcos under our coverage to report lower sequential earnings - the cellcos may see lower 4Q20 earnings due to lower service revenue and higher provisions for doubtful debts while TM’s profitability may be affected by backend-loaded expenses, despite the robust revenue.

2021 Is Shaping Up to be a Tough Year for Mobile Operators

Taking into consideration the prevailing Covid-19 pandemic, weak economic recovery and stiff competition, partly cushioned by the government’s RM1.5bn telco credits for the B40 group, we expect the Malaysia’s mobile service revenue to slip by a further 1-2% YoY in 2021. As a result, we forecast Digi, a mobile pure-play, to see a 1% earnings decline in 2021 while Maxis may see earnings growth of 2.3% driven by revenue from its fixed and enterprise segments that more than offset a decline in mobile service revenue. Against a low base, Axiata may see the highest 2021E earnings growth of 26% driven by recoveries in overseas markets and lower losses from the digital businesses. For exposure to the mobile segment, we prefer Maxis to Digi for its positive 2021-22E earnings outlook and first-mover advantage in developing converged solutions.

TM Remains Our Sector Top Pick, Maintain BUY With Higher TP of RM6.75

We are raising TM’s 2020-22E earnings forecasts by 4-7% after incorporating higher growth in Unifi subscribers, considering the strong underlying demand for fixed broadband during the pandemic and TM’s effective marketing campaigns. Maintain BUY on TM with a higher DCF-derived price target of RM6.75 (from RM6.20). TM is our sector’s top pick for its extensive fibre infrastructure (an essential asset for deployment of national 5G coverage), growing demand for the fixed broadband services and attractive valuation vis-à-vis peers and its 8-year average PER. Also, TM’s business operations should fare better than the mobile operations of its peers during the Covid-19 pandemic / movement restriction period

Source: Affin Hwang Research - 21 Jan 2021