No major surprises. The recent 2Q17 and 1H17 results season saw MAXIS showing signs of improvement (thanks to higher service revenue with better margins) while TM and AXIATA’s results were in-line with no surprises. The relatively steady 1H17 performances helped the players to maintain their respective FY17 KPIs. DIGI, on the other hand, performed in-line with our expectation but below the street’s estimate. 1H17 PATAMI dipped by 11% YoY to RM732m due mainly to the weak prepaid business, higher depreciation and net financing cost. The group reduced its FY17 service revenue guidance (to low-to-mid single-digit decline vs. flattish YoY growth previously) following an uninspiring 1H performance. OCK continued to post a decent set of results in 1H17, thanks to its enlarged towerco assets.

Service revenue growth is set to remain muted. CELCOM was the only incumbent that registered growth (+1.4% QoQ) in service revenue in 2Q17 after a sharp dip in 1Q17. Despite a mild improvement, the group as well as DIGI’s service revenue market share (at 29% each) still lagged behind MAXIS due to the latter’s premium pricing strategy and extensive network infrastructure. Moving forward, we expect the industry’s service revenue annual growth rate in FY17 to continue remaining weak (-1.8% vs. -4.2% in FY16) but to stabilise a year later (+1.1% in FY18).

Less aggressive competition so far but…. While the mobile operators are still vying for a bigger share of the consumer wallets, price competition appeared to be less aggressive for now, suggested that incumbents may have lower appetite for further price disruptive campaigns. Having said that, in view of the fading market share of the top three incumbents’ (where MCMC data shown the aggregate market share has been reduced to 76.4% at end-1Q17 vs. 98% in end-CY11 as a result of the higher acceptance of U Mobile and other MVNO players) coupled with a narrowed network gap, there is a need for players to enrich their value proposition further to differentiate themselves and being aggressive in marketing campaigns to defend their market share, which in-turn may pressure short-term margins. On the fixed-line front, TM’s plan to consolidate its mass-market brands to strengthen quad play proposition could potentially improve its product bundling. Nonetheless, the efforts to raise its share in multi-dwelling units (to tackle Time dotCom’s retail segment) may create a discrepancy in its Unifi services should TM decide to match the latter’s pricing and broadband speed.

GE study. Based on our observation over the past four General Elections (“GE”), there are no clear-cut trends in the Telco sector. Indeed, the sector’s big caps incumbents tend to move in-tandem with the broader market direction with minimal price changes (<+/-5%) during the pre/post parliament dissolution and/or election.

Budget 2018. While we do not expect the sector to be in the limelight in the upcoming 2018 budget announcement (Oct 27), we believe the authority is likely to clarify the outstanding issues stated in the previous budget statement rather than introducing any new initiatives. To recap, the government had announced to cut broadband prices by 50% (by 2019) and provide RM1b to ensure the coverage and quality of broadband nationwide reach up to 20Mbps. We understand that discussions on the above issues are still on-going with no firm decision being made with the government.

Strategy – still prefer fixed-line players overall. TM (MP, TP: RM6.70) remains as our favourite big cap pick for the sector although we do not have any convincing buy call. On the mobile operators front, we favour MAXIS (TP: RM5.90) over its peers due to its extensive network infrastructure and more importantly, signs of operational improvement in its latest quarter. The stock rating, however, is downgraded to MARKET PERFORM after its share price performed well since our last upgrade (to OUTPERFORM) in July. OCK (OP, TP: RM1.05), on the other hand, remains our preferred pick for the mid-cap telecom in view of: (i) its healthy cash flow on the back of escalating recurring income trend, (ii) its ability to ride with the passive infrastructure sharing trend, and (iii) its expanding EBITDA margin trend.

Source: Kenanga Research - 5 Oct 2017