Review of 1QCY24

Generally, the telecommunications sector continued to show resilience amid the competitive operating environment. Mobile incumbents (CELCOMDIGI and MAXIS) collective service revenue jumped 1.0% YoY to RM4,863mn. This was mainly driven by both the consumer and enterprise businesses of MAXIS. Besides, TM also reported higher revenue of RM2,837mn, up 1.8% YoY, thanks to higher demand for domestic and international data. Meanwhile, AXIATA topped its peers with revenue higher by 13.3% YoY, reaching RM 5,662mn. All opcos except Link Net mainly drove the double-digit % growth.

On the earnings front, AXIATA and MAXIS recorded earnings growth whereas CELCOMDIGI and TM suffered from earnings contraction. For AXIATA, the stronger bottom line was largely contributed by the robust earnings performance of XL, which resulted from higher ARPU and improved contribution from data and digital services. Meanwhile, MAXIS reported stronger earnings largely due to higher revenue and stricter cost management. On the other hand, the earnings performance of CELCOMDIGI was hit by higher operating expenses because of voluntary separation scheme, while TM’s earnings were dragged by higher tax expense.

In terms of YTD share price movement, TM (+24.0%) and AXIATA (+10.7%) recorded a decent performance, whereas CELCOMDIGI (- 8.2%) and MAXIS (-5.3%) underperformed.

Going into 2H24, we highlight 3 major factors potentially influencing the telecommunication sector’s performance:

1. Value Propositions

2. Progress on JENDELA

3. 5G: Transition to Dual Wholesale Network

1. Value Propositions

Into 2H24, we believe that Malaysian telecommunications companies will continue to face a challenging operating environment. This is particularly the case for mobile operators, as the country's mature mobile market offers limited opportunities to increase mobile service revenue through new subscriber acquisitions. In 1Q24, Malaysia’s mobile penetration rate was 146.7% per 100 inhabitants.

Looking ahead, we anticipate that service revenue will remain resilient. Rather than engaging in irrational price competition, mobile operators are strategically focusing on value propositions. Initiatives include promoting prepaid-to-postpaid migration, offering converged solutions (e.g., mobile plus fixed broadband bundles), and providing 5G device bundles.

Meanwhile, we continue to see an upside to telcos service revenue from the enterprise segment. We view the enterprise segment as an engine for growth over the long term, with the private and public sectors continue pursuing the digitalisation journey. Aside from the basic mobile and fixed connectivity services, the telcos’ capabilities have extended to more advanced solutions, including managed services, cloud services, artificial intelligence, and Internet of Things solutions, among others.

2. Progress on JENDELA

The ongoing progress with the national digital infrastructure plan (JENDELA) will continue to benefit telcos. Recap, the main objective of JENDELA is to provide more comprehensive coverage and better broadband experience across the country. According to the latest data from Malaysian Communication and Multimedia Malaysia, the fixed broadband penetration rate is about 46.9% per 100 premises in 1Q24. This indicates that there is still further room for growth. Currently, under Phase 2 (2023 to 2025) of JENDELA, telcos will continue playing a crucial role in achieving key targets, including i) premises passed with gigabit access fixed connectivity increases to 9.0mn, ii) mobile broadband speed increasing to 100Mbps, and iii) 100% internet coverage in populated areas. Overall, we expect the ambitious expansion roadmap for fixed broadband, especially within underserved areas, to increase monetisation opportunities for telcos.

3. 5G: Transition to Dual Wholesale Network

Recap, the government moved from Single Wholesale Network (SWN) to Dual Wholesale Network (DWN) in May 2023. We have finally seen some progress on rolling out the second wholesale network, as four mobile network operators (CELCOMDIGI, MAXIS, UMOBILE, and YTL) finally completed the share subscription agreements with DNB. Currently, only TM is still seeking its shareholders' approval in accordance with its governance requirements. According to Communications Minister Fahmi Fadzil, identifying and appointing a telco to build Malaysia's second 5G network will kickstart in July.

Looking into 2H24, we look forward to more positive developments on the 5G rollout, especially on the details of the transition process from SWN to DWN. Among others, this will include the composition of the service providers under Entity B that will be tasked to develop the nation's second 5G networks. At this juncture, the government has not made the precise process for building the second 5G network public. More details, including the potential 5G opex and capex commitments, would provide better visibility of the telcos' dividend prospects. We believe that once the government finalises the details, it will help to clear up the uncertainty in the sector that has dragged on investor sentiment.

Currently, all five major telcos, including CELCOMDIGI, MAXIS, TM, U MOBILE, and YTL, have commercialised 5G services in the market. The 5G adoption rate has started to pick up from 12-15% back in November 2023 to 39.2% as of April 2024. Meanwhile, the 5G coverage stood at 81.7% as of May 2024. Overall, we believe that 5G commercialisation will catalyse opportunities for telcos from the enterprise segment. 5G’s three critical promises of enhanced mobile broadband, ultra-reliable and low latency, and massive machine-type communications will unlock a multitude of new use cases across industries.

Recommendation

In all, we maintain a Neutral stance in the telecommunications sector. Generally, we foresee the service revenue to remain resilient amid the competitive operating environment, as the mobile operators will continue focusing on value propositions instead of price wars. Additionally, we expect continued progress with JENDELA to bode well for telcos. Meanwhile, we look forward to more concrete details about mechanics of the transition from SWN to DWN, as it will help resolve the uncertainty in the sector that has dragged on the investor sentiment.

Top Pick under our sector coverage is TM (TP: RM7.70), as we like for its ambitions to fulfil key connectivity targets under JENDELA, strength to support digital transformation and 5G rollout, as well as its ongoing cost optimisation agenda. On top of that, we also expect TM to benefit from the growing demand for data centres. Besides that, we also have a BUY recommendation on CELCOMDIGI (TP: RM4.64), as the group is expected to benefit via unlocking the synergies from the merger of Celcom and Digi. On the other hand, we have Sell recommendations on AXIATA (TP: RM2.61) and MAXIS (TP: RM3.70).

Key downside risks include unprecedented price competition and unfavourable regulatory changes.

Source: TA Research - 2 Jul 2024