• Keep NEUTRAL; Top Picks: Telekom Malaysia (TM) and OCK Group. The March reporting quarter was characterised by seasonality with industry fixed line earnings again outperforming the mobile sector. The period also saw the full quarter impact of the Celcom-Digi merger which distorted comparatives. Moving forward, we see industry mobile revenue holding up as roaming traffic normalises while the tight mobile competition is set to continue. Uncertainties on the 5G policy front remain a key sector peeve. We continue to prefer fixed line plays.

• Earnings and dividend misses from Axiata Group (Axiata) and Maxis.Five of the six telcos under our coverage reported in-line earnings for 1Q23 with Axiata being the sole underperformer as earnings fell by a sharp 77% YoY due to the full quarter impact of Celcom’s de-consolidation while depreciation and financing cost surged. Mobile revenues were expectedly softer QoQ (-1% QoQ) due to the shorter quarter. Overall, fixed line players booked stronger earnings, at +0.4% YoY vs the 20% YoY decline in mobile earnings (mainly from lumpy accelerated depreciation at CelcomDigi (CDB). Maxis’ lower quarterly DPS payout also took the market by a surprise as developments continue to evolve on the 5G front. Post results, we cut Axiata’s FY23F-25F earnings by 13-26% but lift CDB’s FY24F-25F earnings by 9-15%, after building in stronger merger synergies and an incremental uplift in ARPUs.
   
• Mobile revenue momentum should hold up in the ensuing quarters.Industry mobile service revenue (MSR) (Big-2 telcos) grew 3% YoY in 1Q23, led by Maxis (+5.1%) while CDB grew 1.3%. We expect the YoY growth in MSR to sustain/improve with the further normalisation of tourist footfall (stronger recovery in roaming revenue and prepaid sales). The tight competition, especially at the lower end of the market, should continue to crimp ARPUs with inflationary woes affecting wallet share. In terms of MSR share (excluding fibre revenue), both CDB (adjusted for the removal of Yoodo’s numbers post- merger) and Maxis held steady at 57.6% and 42.4%, with subs market share (SMS) of 63.1% and 36.9%. Splitting CDB’s subs between Digi and Celcom, Digi’s SMS continues to inch higher QoQ which offset the decline in Celcom’s SMS.
   
• Fixed line buoyed by steady fibre broadband (FBB) growth. Continued growth at TM’s internet and global (previously wholesale) segments more than offset weaker enterprise revenue, with group revenue up by 2% YoY in 1Q23. While group EBITDA rose 7.3% YoY on good cost controls, higher accelerated depreciation and impairment charges led to a 15.5% YoY EBIT decline for the quarter. Meanwhile, Time dotCom’s revenue, EBITDA and core earnings posted double-digit YoY growth with data centre revenue up 20% while FBB/retail revenue jumped 23%. We expect the robust FBB growth to continue, supported by the expanding footprint and still modest household penetration of under 50%.
   
• Key risks are competition, weaker-than-expected earnings and regulatory setbacks.

Source: RHB Securities Research - 14 Jun 2023