Maintain NEUTRAL on the telecommunications sector. We expect Maxis and Celcom to retain their subscriber stronghold based on their superior network quality and coverage, respectively. We foresee prepaid and postpaid ARPUs to remain under pressure as MNOs continue to slug it out in a price war. The sector continues its journey towards a leaner operating model as seen in (i) collaboration in infrastructure, and (ii) Digital Nasional Berhad’s sole ownership of the 5G spectrum. Competing to provide subscribers access to the same 5G network, the MNOs will have to compete mainly on price, exacerbating the price competition. We continue to prefer AXIATA (OP; TP: RM4.40) for its exposure to regional markets in the midst of fierce local competition and TM (OP; TP: RM6.85) for its long-term prospects in the cloud/data segment. We maintain our MP call for DIGI, MAXIS and OCK.

FY20 came in mixed. Only Axiata came above as its top-line exceeded our expectation, lifted by stronger-than-expected recovery of OpCos. TM and Digi both came within our expectations. Maxis underperformed due to weaker-than-expected service revenue, mainly dragged by its prepaid segment. OCK also fell short due to slower-than-expected tower roll-outs. 1QFY21 results expectations. Due to MCO 2.0, we expect to see mostly flat revenues, as closure of physical outlets will continue to hamper subscriber acquisition, and subscribers affected by lower disposable incomes will prefer cheaper offerings. With borders still closed and limited inflow of foreign subscribers, we do not see a recovery in Digi’s prepaid subscriber base in the near future.

Churn gained momentum in FY20. Our analysis of subscriber numbers and data by OpenSignal suggests that as people stayed home, the MNOs that had the fastest and widest network thrived. Maxis, known to have the fastest network, gained 4% more postpaid subscribers from 2QFY20 to 4QFY20. Celcom, known to have the widest coverage, saw its postpaid subs grow 4% and prepaid subs grow 11% over the same period (subs churn rarely > +/-10% over 2 quarters). On the other hand, Digi’s postpaid subs base remained flat while their prepaid subs decreased. Based on OpenSignal’s data, UMobile’s experienced the greatest churn, likely due to poor customer experience from coverage quality and/or availability. We believe that as subscribers continue to rely on 4G (post 3G shut down and pre 5G rollout), Maxis and Celcom may continue to be favorites for their quality and coverage stronghold. That said, once the MNOs start using DNB’s 5G network, Maxis and Celcom may lose their competitive edge in attracting and retaining subscribers. However, their reliable/widely-available 4G networks may continue to appeal to subs when (i) 5G is still being rolled out and (ii) when subscribers fall out of 5G-coverage areas.

ARPUs remain under pressure. We believe that the stiff price competition in the mobile space will continue. With the likes of YES and UMobile continuing their low-cost offerings, the big 3 may have to follow suit to retain their subscribers. In the postpaid space, Digi and Maxis are also offering entry-level postpaid packages, which will continue to put pressure on ARPUs. With 5G offerings all reliant on the same DNB-owned network, we foresee continued stiff price competition among the MNOs, as they are left to compete on price and customer service, but mainly on price, in our view.

Collaborations and DNB-ownership of 5G network. In 1QCY21, among other key developments, the government announced Digital Nasional Berhad (DNB) taking ownership of the 5G spectrum and network, and the big 3 announced a collaboration to jointly roll out fibre infrastructure. Moving forward, we would not be surprised of more collaborations among the MNOs in an effort to reduce duplication and inefficient use of assets. We believe it makes sense for the MNOs to jointly roll out costly infrastructure, such as fibre, as they could potentially reduce capex and/or provide greater coverage. That said, we believe that having only one 5G network that is solely owned by DNB presents risks to the 5G rollout, including risks of delay and cost-inefficiencies, which would negate one of the SPV’s initial intentions to help MNOs save costs.

Maintain NEUTRAL on the sector. Moving forward, the MNOs will be busy achieving their JENDELA targets of shutting down 3G and achieving nation-wide 4G coverage. While there could be some accelerated depreciation of 3G assets, we believe that the market has already accounted for that, treating such depreciation as one-off in nature. We continue to like AXIATA (OP; TP: RM4.40) for its exposure to regional markets, as its OpCos provide an avenue for growth at a time when Celcom continues to face stiff competition here in Malaysia. For income-seeking investors eyeing its DPS target of 20.0 sen for 2024, the current share price (RM3.85) implies an attractive forward dividend yield of 5.2% (current industry average: 2.3%). It is worth noting that while MAXIS currently offers the highest dividend yield of 3.8%, we maintain our MP call as its near-term prospects continue to look uninspiring. We also have an OUTPERFORM call on TM (TP: RM6.85) for long-term prospects driven by its cloud and data center segments. Moreover, TM could benefit from leasing its extensive fibre infrastructure to DNB for the 5G rollout. We maintain our MP calls on DIGI and OCK.

Source: Kenanga Research - 5 Apr 2021