The recently-concluded 4Q14 reporting season saw a mixed showing by the  telcos  under  our  coverage.  Generally,  mobile  operators  have adopted  a  cautious  2015  outlook,  with  most  guiding  for  only  low-  to mid-single  digit  revenue  growth.  We  believe  the  telcos  will  still  face challenges  in  effectively  monetising  data  in  the  medium  term,  while traditional revenues will continue to suffer from structural pressure.

A  mixed  showing.  Telcos  booked  a  mixed  performance  for  the  Dec 2014  reporting  season,  which  is  typically  a  seasonal  high.  Axiata  and Maxis  both  underperformed  during  the  quarter,  with  the  former’s earnings  hit  by  Celcom’s  IT  transformation  challenges  and  the  floods  in the East Coast which affected distribution channels. The  weak IDR also crimped  the  contribution  from  XL  Axiata  (EXCL  IJ,  BUY,  TP:  IDR5,700) which has completed its merger with Axis Indonesia. The outperformers for  the  quarter  were  Telekom Malaysia  (TM)  and  OCK Group  on lower-than-expected cost and emerging regional contributions respectively.  

Service  revenue  contracts  slightly,  data  continues  to  gain  ground. The mobile operators continued to be plagued by the structural pressure on legacy revenues (voice and short message service (SMS)) which fell 8.1% in 2014, although the 25% jump in mobile internet revenue partially mitigated  the  downside.  We  expect  pressure  on  legacy  revenues  to continue in 2015 – as the industry’s smartphone penetration, currently in the mid-40s, is expected to trend higher on the back of a wider array of affordable smartphones available in the market and the mobile operators dishing out more bundled data packages to spur data demand.  

A cautious 2015. The telcos, generally cautious on 2015 prospects, are relatively  conservative  in  their  guidance/KPIs  for  the  year.  Most  have guided for low- to mid-single digit revenue growth, building in to a certain extent  the  impact  from  the  Goods  and  Services  Tax  (GST).  Generally, expectations  are  for  the  sharp  decline  in  legacy  revenues  to  persist  in 2015. With voice revenue making up about 60% of service revenue, this could  somewhat  dampen  overall  earnings  growth.  That  said,  the  telcos are ramping up efforts to better monetise data alongside investments to improve  the  quality  of  networks  and  additional  LTE  sites.  We  expect competition to remain intense, as U-Mobile continues to up its ante and with TM looking to encroach into the mobile space later during the year.  

Maintain  NEUTRAL,  Axiata  is  our  Top  Pick. We  expect  the  sector  to exhibit  lacklustre  growth  this  year  due  to:  i)  continued  pressure  on voice/SMS  revenues,  ii)  competitive  risks,  iii)  a  possible  knee-jerk reaction to the implementation of the GST. The impending spectrum re-farming  exercise  may  also  impact  sentiment  of  the  sector.  Axiata remains  our  preferred  sector  pick  as  we  expect  the  rebound  in  XL  and Celcom’s earnings in  2H15  to  catalyse  an  earnings  recovery  for  the
group.

Mixed showing 

It was a mixed bag showing for the telcos in the December reporting season, which is a typical seasonal high. Notable results highlights were:
  The  impact  of  the  late  Dec  2014  floods  in  the  East  Coast  and  extended  issues with  its  IT  systems  continue  to  weigh on Celcom’s performance and that of Axiata Group (AXIATA MK, NEUTRAL, TP: MYR7.65), which had to also grapple with a weaker IDR. XL Axiata had a subdued showing post its merger with Axis Indonesia.  
  Meanwhile,  Maxis  (MAXIS  MK,  NEUTRAL,  TP:  MYR6.55)  posted  the  third consecutive  quarter  of  prepaid  revenue  growth  but  its  overall  mobile  service revenue for 4Q14 contracted 2% YoY due to the erosion in voice (-3% YoY) and SMS (-34% YoY) revenues. This compares with Digi’s (DIGI MK, NEUTRAL, TP: MYR6.60) +3.2% and Celcom’s -2.3% for the same quarter. 

  The  outperformers  for  the  quarter  were  Telekom  Malaysia  (TM)  (T  MK, NEUTRAL,  TP:  MYR7.35)  and  OCK  Group  (OCK  MK,  BUY,  TP:  MYR1.11)  on lower-than-expected cost and emerging regional contributions respectively.

Slight dip in service revenue but data continues to gain ground. The  industry  posted  a  slight  contraction  in  service  revenue  of  1.1%  in  2014  (2013: +0.6%), mainly due to the continued erosion in SMS (-27.2%) and voice revenues (-4.3%)  and  telco-specific  issues.  That  said,  mobile  internet  revenue  sustained  its double-digit  growth  trajectory,  up  24.9%  for  the  year.  Of  the  three  cellcos,  Digi appears to be still leading the efforts on data monetisation, given its stronger mobile internet  revenue  growth  of  40%  vs  the  24.1%  and  16.4%  posted  by  Celcom  and Maxis  respectively.  We  expect  Digi  to  sustain  its  robust  data  revenue  growth momentum, given its fully-modernised network and the focus on driving prepaid data growth  via  affordable  data  bundled  plans.  We  expect  Celcom  to  also  show  an improvement  in  its  revenue  momentum,  with  teething  issues  from  its  earlier  IT upgrade  exercise  fully  addressed  and  the  resumption  of  channel  activities  post  the floods  in  the  East  Coast  where  it  has  a larger  share.  While Maxis’ service revenue appears to have stabilised with a smaller 1.6% YoY dip in 4Q14 vs -4.7% and -5.1% in 3Q14 and 2Q14 respectively, its mobile internet revenue growth was still not able to offset the decline in traditional SMS revenue. 

Unsurprisingly,  the  traditional  SMS  and  voice  revenues  continued  on  their  declining trend  this  quarter,  contracting  by  27.9%  and  5.4%  YoY  respectively  in  4Q14.  We expect  the  pressure  on  legacy  revenues  to  continue  in  2015, as the industry’s smartphone penetration, currently in the mid-40s, is expected to trend higher on the back  of  a  wider  array  of  affordable  smartphones  available  in  the  market  and  the cellcos dishing out more data bundled packages to spur data demand.

Cautious on 2015  
The  mobile  operators  are  generally  cautious  on  2015  prospects  and  are  relatively conservative in their guidance/KPIs for the year (see Figure 7). Most  of them guided for low- to mid-single digit revenue growth, building in to a certain extent the impact from the GST. Generally, expectations are for the sharp decline in legacy revenues to persist  in  2015.  With  voice  revenue  making  up  about  60%  of  service  revenue,  this could  somewhat  dampen  overall  earnings  growth.  That  said,  the  operators  are ramping  up  efforts  to  better  monetise  data  alongside  investments  to  improve  the quality  of  networks  and  additional  LTE  sites.  We  expect  competition  to  remain intense,  as  U-Mobile  continues  to  up  its  ante  and  TM  looking  to  encroach  into  the mobile space later during the year.

We  were  disappointed that  TM  had  opted  to keep  its plans  on  P1  close  to  its  chest with  no  outright  guidance  –  despite  having  consolidated  the  mobile  broadband operator in 4Q14, which diluted the group’s EBIT. TM also kept mum on the recently-awarded  high-speed  broadband  2  (HSBB2)  and  sub  urban  broadband  (SUBB) projects, as the terms of the partnership are still being finalised with the Government. We are, nonetheless, positive on the new projects as growth for Unifi and Streamyx have  stabilised.  TM  does  have  the  expertise  and  resources  to  execute  these  large-scale projects, which should start to contribute to the group’s revenue and earnings in 2017.

Key risks
The key risks to the sector include: i) the more intense competition from new players, ii) a prolonged cautious or negative consumer sentiment post GST, iii) faster decline in legacy revenues compared with the growth in mobile internet, and iv) delays in the execution of the HSBB2 project.  

Maintain NEUTRAL on the sector  
We  expect  the  sector  to  exhibit  lacklustre  growth  this  year  due  to: 

i)  continued pressure on voice/ SMS revenues on the back of higher smartphone ownership and mobile  data  consumption, 

ii)  rising  competition  from  U  Mobile  and,  potentially,  TM later during the year, iii) a possible knee-jerk reaction from the implementation of the GST  in  April  which  could  affect  prepaid  revenue  momentum.  The  impending spectrum  re-farming  exercise  could  also  impact  the  sentiment  on  the  sector,  in  our view,  as  the  telcos  may  have  to  contend  with  sub-optimal  allocations  resulting  in higher-than-expected capex.  Axiata  remains  our  preferred  pick  in  the  Malaysia  telco  space  as  we  believe  the resolution  of  teething  IT  issues  at  Celcom  and  the  realisation  of further  product  and operational  synergies  by  XL  following  its  integration  with  Axis  could  catalyse  a  re-rating in the group’s earnings in 2H15. The  growth  at  the  other  opcos  should  also remain  resilient,  at  around  the  mid-  to  high-single  digit  levels,  thus  bolstering  the group’s overall growth. We also believe there  is  scope  for  Axiata  to  pay  out  more dividends  vs  its  peers,  Maxis  and  Digi,  which  are  already  paying  close  to  100%  (or more) of their available distributable income. 

Source: RHB