Malaysian telco price war cannot be sustained: Analysts

By Goh Thean Eu July 20, 2015

Aggressive discount strategies may spread to prepaid segment too
Digi stock gets a ‘Buy’ call, Maxis a ‘Hold/ Neutral’ rating

Malaysian telco price war cannot be sustained: Analysts

THE intense price competition amongst Malaysian mobile operators is likely to be temporary – at least, that was one of the main key takeaways from analysts briefings hosted by Digi.Com Bhd and Maxis Bhd last week.

“At the results [conference] call, the [Digi] management appeared slightly more positive on its second-half 2015 outlook as it believes the current price competition in the market is not sustainable ...

“... Digi views the underlying price competition in the market as temporary,” RHB Investment Bank analysts Jeffrey Tan and Annuar Rahman said in their research report.

In another research report, the RHB Investment Bank analysts added that Maxis chief executive officer Morten Lundal shared the same sentiment regarding price competition.

“Like Digi, Maxis does not expect the pricing skirmish in the market to be prolonged,” they said.

Operators in Malaysia seem to have been getting more aggressive in their price discounting strategies this year, in a bid to grow their mobile Internet business.

As a result of this, prices of data packages have dropped substantially. UOB Kay Hian analyst Chong Lee Len highlighted that the cheapest data package stands at RM9-13 per gigabit (GB) today, as compared with RM20-25 per GB in the first half of this year. [RM1 = US$0.26]

“[Digi’s] management guides that the current competition is cyclical in nature (and not a reflection of any structurally prolonged weak demand), and thus may be short-lived – this is articulated through management’s relatively optimistic second-half 2015 outlook,” Chong said.

“We are however taking a conservative stance as we expect a relatively flattish third quarter amid price competition among telco players. We expect Digi to reap positive operating leverage and earnings growth momentum to continue only from the fourth quarter of 2015 onwards.”

Although the price discounting competition is currently mainly focused on the postpaid segment, analysts are not discounting the possibility of the price war spreading to the prepaid segment.

Celcom surprised the market in the second quarter 2015 by launching its Basic First38 plan, a package that gives customers 3GB of data, 3GB of complimentary Celcom WiFi, 50 minutes of voice calls, and 50 SMSes to all networks.

Most players reacted to Celcom’s move, with Digi offering 3GB of data, 100 minutes of voice calls, and 100 SMSes for RM36 a month; and U Mobile offering 3GB of data, 50 minutes of voice calls and 300 SMSes for RM28. These offers last for a limited period, however.

While most of the mobile operators were engaged in this price war, Maxis seems to be using a different approach.

“While it had responded to the aggression in the market, we note that Maxis has generally kept to its headline pricing and refrained from promotions that would be value destructive,” RHB Investment Bank said in its report.

“For example, it opted to give more freebies to users rather than discounting the prices of its plans.”

Meanwhile, AmResearch analyst Hafriz Hezry said that the postpaid war may spread to the prepaid space.

“The issue might spread into prepaid as Celcom is moving to introduce a new prepaid plan in the third quarter of 2015,” Hafriz said.

“We trim our financial year (FY) 2015 forecast, FY2016 forecast and FY2017 forecast by 9%, 8% and 8%, respectively, to reflect lower prepaid revenues and lower earnings before interest, tax, depreciation and amortisation (EBITDA) margin assumption.

“We now expect earnings to fall by 1% year-on-year (from an increase of 9% previously),” he added.

Weaker-than-expected performance for Digi

During the first half ended June 30, 2015, Digi registered a 1.4% growth in its revenue to RM3.51 billion (1H2014: RM3.46 billion), while net profit fell 4% to RM943.57 million (1H2014: RM984.07 million).

For the second quarter alone, revenue fell by 1.7% to RM1.72 billion against RM1.75 billion in the same period a year ago, while net profit declined 6.9% to RM464.36 million, versus RM498.91 million a year ago.

The result, in general, was below the expectations of most analysts.

“The first-half 2015 earnings account for 43% and 45% of our and consensus full-year estimates of RM2.01 billion and RM1.95 billion, respectively,” said Hafriz.

During the second quarter, the company added 124,000 new subscribers, comprising 111,000 prepaid and 13,000 postpaid customers. It now has 11.82 million customers.

From the total subscriber base, about 6.84 million or 58% are Internet customers. Digi also reported that 57.1% of its customers are smartphone users.

During the quarter, its capital expenditure (capex) was RM200 million, bringing the first-half capex total to RM393 million. The company expects its full-year capex to be around RM900 million this year.

As a result of its capex, the company managed to expand its 3G (Third Generation) and 4G-LTE (Fourth Generation/ Long-Term Evolution) network coverage to 86.6% and 35% of the population, respectively.

It also maintained its 2015 guidance of low- to mid-single-digit service revenue growth and sustained EBITDA margins at 45%.

Maxis within expectations

While Digi’s second quarter results were below analysts’ expectations, Maxis’ first half results were well within consensus estimates.

During the quarter, it recorded revenue of RM2.11 billion, a 1.8% quarter-on-quarter decline and a 1.3% year-on-year increase.

Its second quarter net profit of RM441 million represented a 7.6% quarter-on-quarter increase and a 1.1% year-on-year decline.

For the first half, it recorded a net profit of RM851 million on revenue of RM4.26 billion.

It also added 49,000 new subscribers during the quarter, mainly from the prepaid segment as the company is gaining traction in the migrant segment. Its postpaid segment lost 27,000 subscribers during the quarter.

“[Nevertheless, the] management appears unperturbed by any risk of potential market share dilution.

“The company remains confident [that the] MaxisOne Plan will help drive top-line for the group. We do not discount further uplifts to MaxisONE postpaid ARPU (average revenue per user), underpinned by Maxis’ superior customer profile with a propensity to spend on mobile charges,” said UOB Kay Hian’s Chong.

Shares still attractive

Malaysian telco price war cannot be sustained: Analysts Despite the weaker-than-expected numbers, some analysts are still optimistic about Digi’s shares on Bursa Malaysia.

UOB Kay Hian’s Chong upgraded the stock to a Buy, with a target price of RM6.30, representing a 16% upside against the previous week’s closing price of RM5.41 per share.

The upgrade came partly because the decline of Digi’s share price over recent months has made the stock look attractive, from the dividend yield point of view.

RHB Investment Bank also has a Buy call on the stock, with a target price of RM6.60.

“We believe the recent rout on its share price has mostly reflected the earnings risks while the stock now implies attractive net dividend yields of 5%,” RHB Investment Bank said in its report.

Meanwhile, RHB Investment Bank and UOB Kay Hian have placed a Hold/ Neutral call on Maxis.

“Maxis’ relatively less attractive prospective dividend yield of 3-4% remains a stock dampener,” said RHB Investment Bank.

UOB Kay Hian placed a RM7.00 target price on Maxis, while RHB Investment Bank has a RM6.50 target price on the stock. Maxis shares closed at RM6.51 last week.

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