Investment Highlights

• Mixed results for 1H2024. Out of 4 companies under our coverage, two were within our expectations. Axiata outperformed due to stronger delivery from core earnings divisions. Meanwhile, CelcomDigi (CDB) fell short of our expectations from lower service revenue for both postpaid (-1.1% YoY) and prepaid segments (-2.1 YoY).

• Sector earnings eased by 1% YoY in 1H2024. This can be attributed to a 14% decline in CDB's core net profit, which was pressured by flattish postpaid and prepaid revenue while 1HFY23 benefited from writebacks of accelerated depreciation of asset useful life. Notably, the sector's earnings were cushioned by Axiata's commendable performance, underpinned by strong contributions from operating divisions, namely XL, Robi and Smart.

• CDB is losing market share. In 1HFY24, CDB accounted for 46% of the mobile market share, ahead of Maxis' 23% and UMobile's 21%. However, CDB lost 1% of its market share as subscriber base fell to 20.2mil in 1HFY24 from 20.5mil in 1HFY23. This was attributed to the large decline in prepaid customers (-648k subs YoY), partly cushioned by expanded postpaid subscribers (+344k subs). Meanwhile, Maxis added 478k subscribers to 10.3mil subscribers in 1HFY24 (vs. 9.8mil subs in 1HFY23), supported mainly by postpaid (+275k subs). This was due to the group's pre-to-postpaid strategy and bundled offerings.

• Stiff competition in postpaid space. CDB's postpaid revenue declined (-1% YoY) even though subscriber base rose (+5 YoY). This suggests that CDB has been subsidising plans to attract more subscribers. On the flip side, Maxis' postpaid service revenue rose by 5% YoY to RM1.8bil due to its pre-to-post migration strategy and efforts in promoting fixed-mobile convergence.

• Challenging prepaid segment. CelcomDigi's prepaid service revenue fell by 2% YoY in 1HFY24 on the back of reduced subscriber base from fewer rotational one-time sim acquisitions. Similarly, Maxis' prepaid revenue declined by 1% YoY as the group preferred to retain quality postpaid subscribers.

• Aggregate sector ARPU increased slightly by 3% YoY. In 1H2024, sector ARPU increased to RM84.90/month from RM82.70/month in 1H2023. The increase was due to a 4% sector topline growth driven by Axiata (+8% YoY) and Maxis (+4% YoY) as the number of subscribers rose by 260k YoY to 33.7mil in 1H2024 from 33.4mil in 1H2023.

• Fixed broadband additions continue to decline. TM's fixed broadband subs net adds in 1HFY24 declined to 12k (vs. 70k in 1HFY23). TM Unifi's sequential fixed/home subscriber additions have been declining since 3QFY21 due to the switch by consumers from fixed-to-mobile and aggressive bundling strategies by MNOs to upsell FBB packages. Maxis' home fibre net adds eased to +27k in 1HFY24 from +37k in 1HFY23. On the flip side, CelcomDigi home fibre subscribers grew steadily to +32k in 1HFY24 (vs. +10k in 1HFY23), attributed to a wide range of exclusive bundling offers to families, gamers and streamers.

• Bright outlook for TM's wholesale business. The rising need for more backhaul sites to support a potential second 5G network alongside high-speed broadband growth may offer a more immediate revenue uplift as TM is well-positioned to leverage on its extensive fibre infrastructure. We assume TM wholesale will constitute 26% of total revenue share by FY26F (vs. 25% in FY23).

• Unlikely for TM to win the second 5G bid. The submission of tenders for 5G spectrum by TM, Maxis, CDB and U Mobile is a key development for Malaysia's 5G rollout with results expected by 4Q2024. However, TM's terminated share subscription with Digital Nasional Berhad (DNB) likely disqualifies its second 5G bid, in our view.

• Prudent capex in 1H2024, higher capex for 2H2024. Telco companies have been spending prudently in 1H2024. Maxis pared down its capex by 25% YoY to RM222mil in 1HFY24 (vs. RM296mil in 1HFY23). Similarly, CDB's capex-to-revenue ratio of 16.7% was within the guided range of 15%-18%. We believe companies are reducing capex as they strategically position to become the second 5G network operator. However, we may see higher costs in 2H2024 as companies ramp up infrastructural investments to support the rollout of 5G networks and related services.

• Maintain Neutral rating on the sector. We remain cautious on the sector due to i) high operational costs from technology refreshes, salary adjustments and site modernisation; ii) potential regulatory setbacks; iii) persistently intense competition in the mobile space; and iv) growing rivalry in the fixed broadband landscape. Also, we downgrade our call on CelcomDigi from BUY to HOLD with a lower fair value of RM4.00/share (vs. RM4.40/share previously) on a reduction in terminal growth rate to 1% from 2.1% previously, premised on declining market share and disappointing results in 1HFY24.
  
  We have BUYs on Axiata (BUY, FV:RM3.50) and TM (BUY, FV: RM7.80). We like Axiata which delivered strong OpCos performance in 1HFY24 while TM is envisaged to enjoy higher wholesale business income from the second 5G network and data centre rollouts.

Source: AmInvest Research - 10 Sep 2024