The Malaysian telcos posted 2QCY14 results that were generally in line. Post results, we have maintained our earnings forecasts, although we do  note  marginal  consensus  earnings  downgrade  for  Time,  TM  and Axiata.  DiGi  continues  to  remain  the  outperforming  cellco,  and  may benefit in the short term from company specific issues that its peers are facing. TM’s wireless ambitions is a threat, but not in the short term.

Steady  2QCY14.  All  six  companies  under  our  coverage  met  our expectations.  DiGi continued to outperform with a 21.3% core earnings growth in 1H14. Overall, margins have remained relatively stable. Interim dividends paid out by the telcos were also within expectations. 

Marginal negative earnings revision trend.  While the telcos’ 2QCY14 results  were  in  line  with  our  expectations,  we  note  some  minor consensus  FY14  EPS  downgrades  in  the  sector.  The  biggest  involved Time  (-7.5%),  possibly  due  to  lower  revenue  growth  expectations. Consensus  trimmed  both  TM  and  Axiata  FY14  EPS  by  2%,  while forecasts for DiGi and Maxis were largely unchanged. 

Celcom a drag to industry  revenue growth.  Service revenue growth remained lacking for the mobile industry in 2Q (-1.0% y-o-y), which is not too surprising due to data repricing made by Maxis that resulted in some lost revenue.    We learn that Celcom has been underperforming (2H14 revenue declined 3% y-o-y) due to IT issues from its internal upgrades, which  management  expects  to  resolve  by  year-end.  While  we  expect industry revenue growth for the mobile sector to remain lackluster in 2H, the positive takeaway is that the key factors are due to company specific issues, and not a reflection of a long term decline,  in our view.

EBITDA  margins  remain  resilient.  The  cellcos’  EBITDA  margins continued  to  remain  resilient,  as  handset  subsidies  remained  in  check while pricing was relatively stable. TM’s EBITDA fell 1.3%-ppts q-o-q to 31.7%,  as  cost  pressures  have  started  to  creep  in,  but  Time’s  2Q EBITDA margin saw a sequential rebound due to recognition of lumpy global bandwidth sales that were largely absent in 1Q

Still NEUTRAL on sector.  We remain NEUTRAL on the sector due as short  term  revenue  growth  within  the  mobile  industry  remains challenging  for  now,  while  we  do  not  expect  competitive  intensity  to recede  anytime  soon.  We  still  like  DiGi,  which  continues  to  show  the least  erosion  in  SMS,  stable  voice  and  the  strongest  data  growth. We also like OCK for itsstrong growth prospects and we expect the group to see  a  much  stronger  2H  upon  starting  maintenance  work  for  a  major cellco  involving  3,800  sites  and  recognizing  maiden  revenue  from  its Indonesian acquisition both within this month.

Snapshots Of 2QCY14 Results 

The Malaysian telcos posted 2QCY14 results that were generally in line, as all six  companies  under  our  coverage  met  our  expectations.  Overall,  margins have remained relatively stable. Interim dividends paid out by the telcos were also  within  expectations.  Following  the  results,  we  have  kept  our  valuations and earnings forecasts unchanged. Our FV for Time dotCom (Time) (TDC MK, NEUTRAL,  FV:  MYR5.20)  is  maintained  at  MYR5.20,  but  downgraded  to NEUTRAL  (from  Buy)  as  we  believe  most  of  the  recent  positive  news  have been priced in.

DiGi  stands  out  as  the  outperformer.  DiGi  (DIGI  MK,  BUY,  FV: MYR6.50) continued to outperform with a 21.3% core earnings growth in 1H14.  Overall,  we  believe  the  relatively  muted results  at Maxis  (MAXIS, SELL,  FV:  MYR6.00)  and  Celcom  were  more  of  a  reflection  of  the respective companies’ internal issues, and not a sign that the industry is in a decline. Maxis is now only beginning to find a firm footing in recovering data  revenue  lost  following  the  elimination  of  pay-per-use  data  pricing early this year.

Short  term  headwinds  for  Celcom.  We  learn  that  Celcom  has  been underperforming (2H14 revenue declined 3% y-o-y) due to IT issues from its internal upgrades, which management expects to resolve by year -end. Some of these teething issues caused network issues in certain areas and an inability for Celcom to react in the market with new products, according to  management.  Nonetheless,  management  hinted  that  it  expects  to regain  the  ability  to  introduce  new  products  in  the  market  sometime  in 3Q14. 

Quiet 1H for OCK but expect more activity in 2H.  OCK Group’s (OCK MK, BUY, FV: MYR1.65) 1H14 earnings made up only 30% of our full-year estimates, but we expect a much stronger 2H as news projects kick-start and the group recognises maiden revenue from its Indonesian acquisition. We  expect  a  much  stronger  2H  as  new  projects  kick-start  and  the company  recognises  maiden  revenue  from  its  Indonesian  acquisition  in Sep. In addition, the company should begin consolidating revenue from its recent  acquisition  of  PT  Putra  Mulia  Telecommunication  (PMT),  a  telco site maintenance company in Indonesia, also sometime in Sep.

TM’s  has  simmering wireless ambitions.  We  note that the introduction of  TM’s  (T  MK,  NEUTRAL,  FV:  MYR6.10)  wireless  broadband  product TMgo last month, which is marketed as a 4G service utilizing the group’s existing 850Mhz spectrum, could be an early sign of the group’s ambitions to re-enter the mobile space. 

But TM still lacks wireless coverage for now. Nonetheless, TM’s lack of wireless broadband coverage and the need to invest about MYR1bn in P1 over  the  next  three  to  five  years  suggests  that  the  competitive  intensity should  remain relatively muted  to the cellcos for now. Thus far, TM’s 4G service has been officially launched in the less populated states of Kedah and Melaka, but we think that this may serve as a test bed for TM before making a more aggressive foray into the key urban centres such as Klang Valley, Penang and Johor Baru.  We note that TM’s pricing appears fairly attractive  at  about  MYR10-20/GB,  depending  on  validity  period  vs.  the incumbent’s mobile data postpaid pricing of MYR15 -30/GB for additional data quota.

Earnings revision trend
While the telcos’  2QCY14 results were in line  with  our  expectations,  we note  some minor  consensus  earnings  downgrades  in  the  sector.  The  biggest  involved  Timewhereby consensus lowered FY14 EPS by 7.5% to 21 sen  (similar to our forecast) possibly  due to lower revenue growth expectations.  Consensus trimmed TM’s FY14 EPS by 2.3% possibly due to higher-than-expected tax, while forecasts for DiGi and Maxis  were  largely  unchanged.  Following  a  full  quarter  of  XL -Axis  integration, consensus shaved 2.2% off Axiata’s (AXIATA MK, NEUTRAL, FV: MYR7.30) FY14 EPS.

Revenue growth & EBITDA margins

Service revenue growth remained lacking for the mobile industry in 2Q (-1.0% y-o-y), which is not too surprising due to data repricing made by Maxis that resulted in some lost revenue. In addition, Celcom’s service revenue growth has been tepid (+0.2% y o-y), which was caused by IT issues arising from internal upgrades. While we expect industry revenue growth for the mobile sector to remain lackluster in 2H, t he positive takeaway  is  that  the  key  factors  are  due  to  company specific  issues,  and  not  a reflection  of  a  long  term  decline,  in  our  view.  Meanwhile,  TM  continue  to  record another strong quarter (+8.0% y-o-y), mainly due to lumpy customer projects.

The  cellcos’  EBITDA  margins  continued  to  remain  resilient,  as  handset  subsidiesremained in check while pricing was relatively stable. Maxis’ 2Q EBITDA margin was surprisingly strong, but we do not expect this to be sustainable as it is  expected to ramp up advertising to improve branding and win back market share .  TM’s EBITDA fell 1.3%-ppts q-o-q to 31.7%, as cost pressures have started to creep in from higher supplies and  materials costs.  Time’s  2Q  EBITDA margin  saw a sequential rebound due to recognition of lumpy global bandwidth sales that were largely absent in 1Q.

Voice & data

DiGi’s  continued  strong  growth  in  mobile  internet  (+9.3%  q-o-q,  +39.5%  y-o-y) continues to drive  data  contribution  higher to its topline.  DiGi’s new CEO, Lars-Ake Norling  intends  to  maintain  DiGi’s  revenue  growth  momentum,  and  we  expect management to keep mobile internet as the primary growth engine while aiming to lead the market in data monetisation. After a soft 1Q, Maxis and Celcom also posted strong sequential mobile internet revenue growth (8-10% q-o-q) after a flat 1Q, which is positive against a backdrop of eroding SMS and voice revenues.

SMS revenues continued to be eroded by rising over-the-top (OTT) usage,  and  DiGicontinues to  fare better than its peers with just a  4% q-o-q decline (vs  7-8% for its peers).  On  a  positive  note,  the  pace  of  sequential  decline  for  the  cellcos  has moderated compared to 1Q, which saw declines in excess of 10% q-o-q. The  cellcos’  voice  revenue  did  not  hold  up  well  in  2Q,  as  Celcom  and  DiGi  both registered  a  1%  sequential  decline,  although  Maxis  managed  to  keep  its  voice revenue  steady.  Average  revenue  per  user  (ARPU)  for  the  cellcos  were  generally stable  for  both  prepaid  and  postpaid,  on  the  back  of  relatively  stable  minutes  of usage (MOU).

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  as  short  term  revenue  growth  within  the mobile  industry  remains  challenging  for  now,  while  we  do  not  expect  competitive intensity to recede anytime soon. We still like DiGi, which continues to show the least erosion in SMS, stable voice and the strongest data growth. We also like OCK for its strong growth prospects and we expect the group to see a much stronger 2H upon starting maintenance  work  for  a  major  cellco  involving 3,800  sites  and  recognizing maiden revenue from its Indonesian acquisition both this month.Mobile  competition  remains  rational  in  our  view  as  we  observe  there  is  no  real downward pressure on data pricing. While we think TM has wireless ambitions and has launched a 4G service with  attractive  pricing compared to the cellcos,  coverage remains an issue for TM. This should provide the cellcos some breathing space in the short term to take care of internal IT issues and complete the process of modernising their networks by end-2015. In our view, DiGi may emerge as the biggest beneficiary in  the short term having completed  its  network  modernisation  early,  and  has  been aggressively promoting its network as being better and faster. We remain NEUTRAL on Axiata, with a SOP-based FV of MYR7.30. Domestically, IT issues  from  internal  upgrades  will  put  a  lid  on  Celcom’s  growth.  We  are  also NEUTRAL  on  TM  as  FY14  earnings  growth  is  lacking  due  to  the  expiry  of  tax incentives,  although  the  anticipation  of  HSBB  Phase  2  and  good  revenue  growth momentum may provide support for the share price in the short term. 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. While we think Maxis may have seen the trough in terms  of earnings  in  2Q,  management’s  downgrade  in  service  revenue  guidance  for  FY14 
(FY14 to  be slightly lower than in FY13) from its previous guidance  (stable service revenue  growth  y-o-y)  suggests  that  Maxis’  recovery  may  take  longer  than anticipated.

Source: RHB