We maintain our NEUTRAL view on the telecommunication sector. 2016 is expected to be another landscaping changing/planting year for all telcos with on-going spectrum re-farming exercises in the mobile space coupled with TM’s HSBB2 and SUBB projects rollout. Thus, there is no surprise that most of the sector players are merely expecting a flattish performance in CY16. Broadband penetration, network coverage/quality/speed, forex and competition will continue to remain as the game factors for the year 2016. Valuation-wise, we make no changes to all our telco companies’ FY16-FY17 earnings estimate. While we do not have any conviction buy call under the telecommunication sector for now, we still favour the fixed-line player rather than the mobile operators due to lesser competition in fixedbroadband business as well as entering the more lucrative mobile segment through P1. We reiterate our MARKET PERFORM calls on TM (TP: RM6.92), Axiata (TP: RM6.10), Maxis (TP: RM6.48) and Digi (TP: RM5.24).

Uninspring FY15 results. The sector incumbents’ CY15 report cards were generally within expectations, with Axiata being the only player that failed to meet forecasts (due to the higher-than-expected effective tax rate and MI). Mobile incumbents’ aggregate service revenue, meanwhile, contracted by 2.6% in 4Q15 (vs. 0.3% QoQ in 3Q15), bringing its full-year performance to -0.8% YoY. The tepid service revenue growth was mainly attributed to the poor Celcom’s performance as a result of heightened competition and flattish performance in Digi. Maxis’ service revenue (3.8% YoY in FY15), on the other hand, continued to gain traction as a result of a continued uptrend in its prepaid and stable postpaid revenue. Fixed-line operator – TM’s FY15 result came in within expectations but failed to achieve its revenue growth KPI despite the group managing to shine at the EBIT level.

2016 – a landscaping changing/planting year for all telcos. The recent conclusion of the 900MHz and 1800MHz spectrum reallocation plan (where the frequency assignments are expected to be issued in August 2016 for full implementation by 1 July 2017) is expected to keep Cellcos busy in the remaining quarters to re-modernise/re-configure their new networks. On top of that, we also understand that MCMC intends to optimise usage of other relevant spectrum bands such as the 700MHz, 2300MHz, 2600MHz bands and etc., by the end of 2016. While the new spectrum fee is yet to be determined, MCMC had confirmed earlier that a similar system (to the previous practice for 3G frequencies) will be adopted where payments will be made in phases and allow operators to roll out services without passing on the cost to consumers. On the other hand, the rollout of the HSBB2 and SUBB projects are expected to keep TM busy until CY19. HSBB2 will be rolled out over a period of 10 years with the authority investing RM500m and TM RM1.3b to provide high-speed broadband access to over 390k premises by 2017. SUBB, meanwhile, will be rolled over a period of 10 years and cost RM1.6b (of which the government will bear RM600m) to provide broadband access to over 420k premises by 2019.

Muted earnings outlook. The recent release of the industry incumbents’ FY16 KPIs (where most of the mobile players are expecting a relatively flattish service revenue and EBITDA annual growth rate, a similar growth pace as per FY15) suggested that any opportunity on the topline could be largely offset by the costly customer acquisition (i.e. elevated marketing/network expenses as a result of the heightened competition) and weak consumer sentiment. Data segment remains the key growth area where Celcos continued to spend heavily and strengthen their network coverage to capture opportunities from the growing internet demand. Competitions among the prepaid and postpaid segments are expected to remain intense with players exploring ways to stay competitive by closing their products’ pricing and contents gap (i.e. data and valued-added services offered) against its peers. TM, meanwhile, is expecting a slower topline annual growth of 3%-3.5% (vs. targetd 4%-4.5% in FY15) with EBIT maintained at FY15 level (at c.RM1.52b). The EBIT margin pressure is expected to come from the HSBB2 and SUBB projects rollout.

Risks and opportunities. Potential change in regulatory landscape (i.e. TPPA, and spectrum re-framing) and irrational pricing schemes will continue to be the key risks' factors for the incumbents. Having said that, broadband penetration, network coverage/quality/speed, forex and competition will still remain as the other game factors for 2016. While prices offered by telcos are already at a very competitive level, the key differentiating factors are likely to come from the valueadded services and consumer experience. The internet of things (IoT) and big data analytics, meanwhile, are expected to get more acceptances and drive the data demand moving forward. All these suggested that the incumbents need to continue their hefty capex plan to maintain competitiveness.

Still prefer fixed line than cellcos for now. Despite not having any conviction buy call between the incumbents, we still favour the fixed-line operator – TM than the mobile players (given the persistent price war and heightened competition) due to its lesser competition in its fixed-line broadband business as well as entering into the lucrative mobile segment through P1 in coming months. Having said that, we do not discount that P1 may require a gestation period of a few quarters in view of its higher-than-expected losses incurred in the previous financial year. 

Source: Kenanga Research - 5 Apr 2016