• Top Picks: Axiata Group and OCK Group. Malaysian telcos had a typical seasonal start to the year, with continued weight on ARPUs from inflationary pressures and the tight competition. Upselling of mobile fibre bundles remains a key focus, with Telekom Malaysia (TM) unveiling its latest converged proposition, UniVerse. We continue to favour the fixed/integrated plays, on structural catalysts and the stronger earnings outlook. Maintain NEUTRAL on sector. Competition, earnings misses and regulatory setbacks are key risks.

• The quarter that was. Broadly, telcos delivered in-line results for the March quarter, with a consensus beat from Axiata while CelcomDigi (CDB) fell short. The quarter was characterised by seasonality, with industry mobile service revenue (MSR) down 1.1% QoQ. MSR rose by 0.1% YoY, with Maxis notching further revenue market share (RMS) gains at CDB’s expense, on solid postpaid growth (+6% YoY). Maxis’ EBITDA market share (EMS) also grew 2% pts QoQ to 41.4%, at the expense of CDB whose EMS eased further to 58.6%. Industry blended ARPUs stayed under pressure (-4% YoY) on inflationary headwinds and tight competition. There is no change to the telcos’ 2024 guidance ie low single-digit service revenue growth and flat EBITDA/EBIT.

• Fixed line still rules. Aggregate fixed line revenue and core earnings (TM and Time dotCom) grew 2% and 22% YoY in 1Q24, with the normalisation of tax rates at TM. TM also made accounting adjustments on the recognition of government grants (retrospectively adjusted) with a neutral EBIT impact. Meanwhile, aggregate core mobile earnings (Maxis and CDB) grew 14% YoY on cost discipline. Axiata’s 1Q24 core PATAMI more than doubled YoY on strong double-digit EBITDA growth (+16% YoY), with its EBITDA margin at a new high. This was led by growth across most mobile assets with the key standouts being XL Axiata (EXCL IJ, BUY, TP: IDR3170), Smart and edotCo.

• CDB’s network integration on track; staff severance cost booked. CDB booked MYR139m in severance cost in 1Q24 involving 600 of its staff. This led to a 12% QoQ decline in EBITDA, with overall headcount lowered to 3500- 3700. It expects MYR80-90m in cost savings from the exercise by year-end, forming part of the MYR700m in gross synergies guided for FY24. The telco’s network integration is nearing the half way mark (>7,200 sites modernised) with the target to complete this by 2025. CDB has also cut the number of key dealers, from 16 to 8 following the revamp of its distribution channels.

• 5G clarity soon? In a 7 Jun press statement, Maxis reaffirmed its support and commitment for the transition to a second 5G network, and said it is ready to complete the share subscription agreement (SSA) process ahead of time. The Government has set a 21 Jun deadline for the five telcos to finalise the SSAs for a combined 70% stake in Digital Nasional (DNB). A stake in DNB would pave the way for the rollout of a second 5G network, but this would take time and access seekers will still need to ride on DNB’s network in the medium term.

Source: RHB Securities Research - 20 Jun 2024