We reiterate our NEUTRAL call on the telecommunication sector. Broadband prices are expected to drop by between 11% to 57% range in a month of two, according to the Communications and Multimedia Minister. While we believe the sector could face some margin pressures as a result of the lower broadband entry prices, the impact is likely to be short-lived given consumers’ tendencies to upgrade to higher connection speeds as well as subscribe to more valued-added and Internet-related services once they have more Internet experience. We keep all our telecom companies’ earnings forecast unchanged for now, pending further clarifications. We continue to like Digi (OP, TP: RM6.87) for its higher operational efficiency as well as better competency in monetising data. Meanwhile, we are keeping our MARKET PERFORM ratings on Telekom Malaysia (TM, TP: RM7.50), Axiata (TP: RM6.82), and Maxis (TP: RM7.16) as well as the ACCEPT OFFER call on Redtone (TP: RM0.80).

Lower prices for basic broadband packages. Prices for the basic broadband packages are expected to be lowered by between 11% to 57% range in a month of two, according to Communications and Multimedia Minister Datuk Seri Ahmad Shabery Cheek. The minister said that commitment was given by all the major telecommunications companies, namely Maxis, Celcom, Digi, U Mobile, Telekom Malaysia and TIME. Mobile packages are expected to be offered at RM25 for a monthly data cap of 1GB, according to the minister. Consumers who subscribe to these packages will have at least 3G-HSPA for both prepaid and postpaid services. The reduction works out to be approximately 14% lower than current prices. On the fixed services' front, TM is expected to offer a basic broadband package at RM38 a month for 1Mbps of free data usage up to 1GB, which is about 57% lower than the current price at RM88 for the basic package. The minister also expressed that making broadband more affordable for both mobile and fixed services will allow the rakyat to get connected more easily and he did not want the quality of service to be jeopardised following the drop in the broadband prices. This is essential as Malaysia moves towards becoming a digital nation.

Consumers – the ultimate winner. We concur with the minister’s view and believe with these valuefor- money offerings, more consumers will be able to get into the digital mainstream and participate in the digital world. There is no surprise all the incumbent shown support to the government’s initiative given that the data segment is the key earnings' driver moving forward. These value-for-money packages are expected to accelerate broadband adoption rate further among Malaysians and subsequently could provide opportunities for the industry players to up-sell their packages (or via bundle services) as well as Internet-related services. Note that, the broadband household penetration rate stood at 70.2% as of end-2014, while the big three cellcos smartphone penetration rate was at the 49%-57% range.

Source: Kenanga Research - 16 Apr 2015