• Out of five companies under our coverage, all companies aligned with our expectations.
   
• We expect ARPU to remain steady in Malaysia's mature and saturated market. However, there is upside risk to it as telco players are putting efforts to expand service offerings, including the introduction of converged plans.

• In the long run, the enterprise segment is expected to drive earnings as digitalization becomes essential for competitiveness, and technological convergence will enable telco players to innovate and broaden their service offerings.

• We maintain an OVERWEIGHT stance on the Telecommunications sector with TM (BUY, TP: RM7.77), and TIME (BUY, TP: RM6.09) as our top picks.

Modest Revenue Growth

The recent corporate earnings season for telecommunications companies delivered outcomes in line with expectations. All five companies under our coverage met projections, with improved performance driven by better service revenue and increased demand for data. The sector's top-line for 1HFY24 saw a slight increase of 3.8% YoY. TIME recorded the highest YoY revenue growth at 10%, supported by strong contributions from Retail (+13.0% YoY) and Wholesale (+10.0% YoY). Axiata followed with a 7.8% YoY revenue increase to RM11.4bn, driven by improvements across all operating companies except for LinkNet and Dialog. Meanwhile, other telco players recorded relatively flat top-line growth. At the bottom line, all tracked telco companies reported better earnings in 1HFY24, except for TM, which posted a profit of RM821mn, marking an 8.6% YoY decrease from RM898.8mn in the same period last year, which had benefited from the utilization of tax losses.

Converged Plans to Support ARPU Ahead

The total number of subscribers has slightly increased. Unifi's fixed broadband segment grew by 1.2% YoY to 3.14mn subscribers, while Maxis saw a 4.9% YoY increase in total consumer subscriptions. In contrast, CelcomDigi's subscriber base declined by 1.2% YoY, mainly due to a drop in prepaid revenue linked to fewer onetime SIM purchases. Average Revenue Per User (ARPU) remained stable for CelcomDigi, while both Maxis and Unifi experienced declines in ARPU. Looking ahead, we expect ARPU to remain steady in the medium term, reflecting the market's maturity and saturation in Malaysia, one of Asia's most developed mobile markets, with a penetration rate of 148.5%. While we recognize the limited potential for further monetization in the mobile segment, we believe that telecom companies' efforts to expand their service offerings, such as converged plans, will enhance earnings. For CelcomDigi, increased adoption of Converged ONE plans has led to growth in both Postpaid and Home & Fibre subscribers. Maxis is also focusing on promoting convergence and bundling to strengthen its customer base. Despite the lower ARPU for Unifi this quarter, TM is expected to stabilize it in the coming quarters through the UniVerse campaign and the new mobile UNI5G WOW. We believe the UniVerse campaign, will lead to better adoption and revenue growth for Unifi Mobile in the coming quarter.

Long Term Growth Potential

Despite the uncertainties surrounding the finalization of 5G dual network model and the concern that it may constrain share price growth for telecom companies in the medium term, we remain optimistic about the long-term outlook. The enterprise segment is projected to bolster earnings as digitalization becomes crucial for both private and public sectors to stay competitive. Additionally, we anticipate that technological convergence will allow telco players to innovate and expand their service offerings. Emerging technologies like the Internet of Things (IoT) and cloud computing are expected to present new opportunities for telco sector. Note that IDC survey shows that nearly 70% of Malaysian enterprises are either using or planning to adopt cloud solutions, driven by the need for scalability, cost efficiency, and digital transformation. In response to the rising demand for cloud services, the Malaysian government has approved the development of more data centres, which in turn increases the need for highcapacity fiber optic networks. TM, in particular, is preparing for a significant rise in fiber installations and upgrades to meet this demand, which is crucial for the expansion and efficiency of data centres. This increased fiber demand will enhance connectivity and drive growth and digital transformation. While TM and TIME are expected to benefit from the growing data centre sector, it is also worth noting that Maxis is also seeking further opportunity to provide fixed connectivity services for data centres and is currently connecting multiple data centres across the country.

OVERWEIGHT on the Sector

Maintain an OVERWEIGHT call on telecommunications sector, driven by (i) anticipation of better 5G monetization in the long run, (ii) certainty on the final structure for Malaysia's 5G network could improve sentiment on the market, (iii) attractive 5G-related bundling packages as well as convergence plans to support ARPU, (iv) higher investment in data centres, (v) anticipation of higher 5G adoption rate which lead to wider range of service offerings and further room for earnings growth as well as (vi) expectations of recovery in roaming contributions due to increased usage by migrant workers and tourists, as Malaysia's tourism sector aims to welcome 27.3mn tourists in 2024. Our top picks are (i) TM (BUY, TP RM7.77) – the main beneficiary in providing services for both public and private sectors, and (ii) TIME (BUY, RM6.09) with positive long-term business outlook and strong demand for data and data centres

Source: BIMB Securities Research - 4 Sept 2024