Malaysian  telcos  reported  1QCY14  results  that  were  generally  in  line,with the exception of Time.  We roll  forward our valuation  base for the telcos to FY15.  Post results, we  also maintain  our earnings forecasts. While  we  remain  NEUTRAL  on  the  sector  due  to  signs  of  increasing competition,  we  still  like  DiGi,  which  continues  to  show  the  least erosion in SMS, stable voice and strongest data growth.

• Quiet  1QCY13.  Four  out  of  the  five  companies  under  our  coverage  –Axiata, Maxis,  DiGi  and  Telekom Malaysia (TM)  –  reported results that were  within  our  expectations.  Time  dotCom  (Time),  however,  had  a relatively soft quarter due to a timing issue on global bandwidth sales.
• Earnings revision trend.  As the telcos’ 1QCY14 results were generally in line, there was hardly any significant revision in consensus earnings estimates,  in  particular  for  DiGi  and  TM.  However,  the  consensus trimmed  Axiata’s  FY14F  earnings  by  1.2%,  partly  due  to  XL  Axiata (EXCL  IJ,  NEUTRAL,  TP:  IDR4,700)-Axis  integration  costs.  The consensus  also  tweaked  Maxis’  FY14  earnings  lower  (-1.4%)  due  to some lost revenue from data repricing.
• Softest revenue growth since 3QCY12. The sector’s 1Q y-o-y revenue growth of 2.3% was one of the softest since 3QCY12  (+2.9%). This was partly  due  to  a drag in  Maxis  caused  by  data  re-pricing,  while  Celcom booked in lower universal service provision (USP) project revenue.  TM had a good quarter (+8.1%  y-o-y), mainly due to  the  spillover of some lumpy customer projects from 4QFY13.
• EBITDA margins  relatively stable.  The cellcos’ EBITDA margins  were somewhat  stable,  as  they  were  not  really  aggressive  with  handset subsidies. We expect the cellcos’ EBITDA margin to stay relatively stable going  forward  –  except  for  Maxis,  which  is  expected  to  ramp  up advertising to improve branding and win back market share – as we note that subsidies on handsets have remained rational . TM’s EBITDA margin remains resilient, but Time’s EBITDA margin fell 4.4-ppts y-o-y partly due to  a  one-off revenue item (an  MYR8.5m non-recurring node fiberisation contract) that boosted 1Q13 margins.
• Still  NEUTRAL on sector.    We remain NEUTRAL on the sector due to signs  of  increasing  competition  as  the  incumbent  cellcos  continue  to cede subscriber market share. Besides that, monetising data remains an ongoing  challenge,  with  flat  sequential  mobile  internet  revenue  growth for  both Celcom and Maxis. The 1QCY14  results  reaffirm our view that DiGi is  monetising  data most effectively.  Having modernised its network early,  we  believe  DiGi  is  poised  to  capitalise  on  stronger  data  growth now  that  it  has  narrowed  its  3G  population  coverage  gap  with  peers. Maxis is our only SELL call currently.

Snapshots Of 1QCY14 Results 

The Malaysian telcos reported 1QCY14 results that were generally in line, with the exception of Time dotCom  (Time)  (TDC MK, BUY, FV: MYR5.20),  which had a relatively soft quarter  due to a timing  issue on global bandwidth sales. Post  results,  we  have  maintained  our  earnings  forecasts  and  also  rolled forward our valuation bases to FY15.

• SMS  under  acute  pressure.  Short  message  service  (SMS)  revenues remained under pressure. This is something  acknowledged by the telcos, which  find  the  trend  almost  irreversible.  With  free  messaging  becoming more widespread as smartphone adoption picks  up, bundling more SMS quota into plans is unlikely to generate much result.
• Maxis feels the biggest pinch.  Maxis (MAXIS MK, SELL, FV: MYR6.00) experienced  one  of  its  steepest  y-o-y  service  revenue  declines,  as  both voice and data revenues shrank. This clearly outlines  the transitory phase that the company is going through, as it attempts to revive revenue growth by having first refreshed  its prepaid offerings and now postpaid plans. For 1QCY14,  Maxis  saw  SMS  revenue  drop  by  30.3%  y-o-y,  followed  by Celcom (-24.0%) and DiGi  (DIGI MK, BUY, FV: MYR6.20)  (-19.1%). Four years ago, SMS used to contribute roughly 40-50% of data revenue, but this  has since dwindled to about 20-25%. As for voice, it  also experienced the sharpest y-o-y drop (-4.8%), but Celcom (-1.4%) and DiGi (+0.5%) had decent figures.
• New  postpaid  plans.  We  note  the  introduction  of  a  few  new  postpaid plans in the market  recently,  which are  largely aimed at stimulating data usage. A prevailing concern among  subscribers  is the worry of bill shock for  exceeding  their  data  quotas.  To  address  this,  Maxis  introduced  the ONEplan,  which  does  away  with  excess  data  usage  to  provide  a  worry free experience, similar to what it did with #Hotlink, which was launched in Oct 2013 for the prepaid segment.
• Rational  data  competition.  In  an  effort  to  better  monetise  data,  Maxis appears to be making an effort to keep data prices  steady by not bundling too  much  data  quota  on  the  new  postpaid  ONEplan.  Maxis  charges MYR30/Gigabyte (GB) if a user exhausts its quota on  the ONEplan, which is  higher  than its previous  SurfMore  plan of  MYR15/GB. Nonetheless, the
• ONEplan  offers  significantly  more  voice  and  SMS  quota.  While  the  new plan  is  laudable  from  a  data  monetisation  perspective,  it  remains  to  be seen if it will gain a following among the more discerning customers.
• Network  modernisation.  Having  modernised  its  network  early,  we believe DiGi is poised to capitalise on stronger data growth now that it has narrowed its 3G population coverage gap with peers  (all mobile operators have c.80% 3G population coverage  currently).  We understand that both Maxis and Celcom are in the process of modernising their networks, which would likely be completed by end-2015.
• TM quietly delivers.  TM(T MK, NEUTRAL, FV: MYR6.10)’s  1Q revenue growth  (+8.1%  y-o-y)  was  somewhat  boosted  by  a  spillover  of  lumpy contributions  from  other  projects,  but  we  expect  management  to  still deliver on  its 5.0-5.5% FY14 key performance indicator.  Its management acknowledged that UniFi subscriber growth is slowing due to early signs of maturity,  but we should  see another spurt of growth once  it irons  out the final  details  of  high-speed  broadband  (HSBB)  Phase  2  with  the Government in the coming few months.

Revenue growth & EBITDA margins

The sector’s 1Q y-o-y revenue growth  of 2.3% was one of the softest since 3QCY12 (+2.9%). This was due to  a drag in Maxis,  caused by data repricing, while Celcom booked in lower universal service provision (USP) project revenue. Nonetheless, we should  see  Celcom  registering  low  single  y-o-y  revenue  growth  in  the  coming quarters as more USP projects kick in.  TM  had a relatively strong quarter  (+8.1%), mainly due to spillover of some lumpy customer projects from 4QFY13.

The  cellcos’  EBITDA  margins  were  somewhat  stable,  since  they  were  not  really aggressive with handset subsidies.  We expect the cellcos’ EBITDA margins  to stay relatively  stable  going  forward  (except  for  Maxis,  which  is  expected  to  ramp  up advertising  to  improve  branding  and  win  back  market  share),  as  we  note  that subsidies  on  handsets  have  remained  rational.  There  were  some  interesting  new devices such as the  Samsung S5  and  Xiaomi Mi3  launched during 2QCY14,  but we observe that the cellcos are not simply giving away handsets cheaply. For example, a cellco is offering the popular  Xiaomi Mi3  for free (Recommended retail price (RRP): MYR899) with a RM148 monthly contract, but the subsidy is in fact lower than the Samsung S5 offered by the same cellco for MYR999 (RRP: MYR2,399) with a similar monthly commitment.

TM’s EBITDA margin remains resilient, but  Time’s EBITDA margin  fell 4.4-ppts y-o-y partly due to a one-off revenue item, ie an  MYR8.5m non-recurring node fiberisation contract, that boosted 1Q13 margins.

Voice & non-voice

DiGi’s  strong  growth  in  mobile  internet  (+7.5%  q-o-q,  +41.1%  y-o-y)  continues  to drive its non-voice revenue contribution higher and overtake  Celcom in the process. Sequentially,  mobile  internet  revenue  growth  (the  biggest  non-voice  revenue contributor) was flat for both Celcom and Maxis. While not unsurprising for Maxis, this came as  a  negative surprise  for Celcom.  This is compounded by the fact that both companies  are  seeing  declines  of  13-14%  q-o-q  in  SMS  revenue.  Increased competition  from  U  Mobile  may  be  a  contributing  factor.  Maxis  has  responded  by refreshing its postpaid offerings this month, and we suspect Celcom will like ly follow suit soon to remain competitive.

SMS revenues  continued to be eroded by rising over-the-top (OTT)  usage, although DiGi fared better than its peers with just a 6% q-o-q decline (vs 13-14% for its peers).On a positive note, the cellcos’ voice revenue held up relatively well, except for Maxis (-4.8% q-o-q). Average revenue per user (ARPU) was generally stable for prepaid on the back of relatively  stable minutes of usage (MOU), but postpaid ARPU remains under pressure from ongoing voice-to-data substitution.

Risks and earnings forecasts
The  risks  to  our  view  include:  i)  weaker-than-expected  subscriber  additions,  ii) poorer-than-expected execution (such as network upgrades and expansion), and iii) an intense pricing environment. We make no changes to our earnings forecasts for now.

Valuations and recommendations
We remain NEUTRAL on the sector due to signs of increasing competition.  We still like  DiGi,  which  continues  to  show  the  least  erosion  in  SMS,  stable  voice  and  the strongest data growth.  We roll  over our valuation base year to FY15, and keep our buy calls on DiGi and Time. While Time had a soft 1QFY14,  its  management guided that it is currently working on a few large orders  – and we believe this should support its 15-20% revenue growth expectation for 2014 (our forecast: 16%). Unless  the  cellcos  successfully  package  their  plans  with  SMS  more  effectively  to make  SMS  relevant  again,  OTT  applications  will  likely  continue  eroding  SMS revenues. We think Maxis’  latest  postpaid plan  is one step towards  addressing  this issue by offering a generous quota of 3 ,000 SMS, but it remains to be seen if this can stimulate SMS usage sufficiently to mitigate the decline in SMS revenue.

We remain NEUTRAL on Axiata, with a SOP-based FV of MYR6.85. Domestically, intensifying competition appears to be putting a lid on Celcom’s growth while Axiata’s FY14  earnings  growth  remains  cloudy  on  XL  Axiata’s  continued  challenges  in monetising data. In addition, the  full extent of losses at newly-acquired Axis remains unclear (12 days of contribution from loss-making Axis equaled IDR64bn in losses). We keep our SELL call on Maxis, with a DCF-derived FV of MYR6.00, as we think the  stock  lacks  catalysts  due  to  its  lacklustre  earnings  growth  and  the  potential pressure  on  its  margins.  We  forecast  an  FY15  DPS  of  32  sen  following  its management’s guidance that it will not gear up beyond its  comfortable limit of 2.0x by year-end (1Q14: 1.5x).

Source: RHB