1Q19 Telco Roundup: Big Three have seen better days

• Analysts say 2Q will be as challenging as 1Q
• They are generally positive on Telenor Asia-Axiata merger

THE Big Three telcos of the Malaysian mobile industry saw declines in service revenue, subscribers and average revenue per user (ARPU) during the first quarter ended April 2019.

Maxis remained the revenue leader despite Digi’s leading position in terms of subscriber base. According to analysts with local investment banks, the 1Q19 mobile industry service revenue fell 3.6% year-on-year (y-o-y) due to a 33% cut in the regulated mobile interconnection rates (which came into effect in January).

AmBank noted in a recent research report that Digi continued to command the largest subscriber market share at 36% versus Maxis’ 35% while Celcom remained a distant third at 29%.

“Digi’s pole position since 1Q16 stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. However, Maxis is strongest in the postpaid segment with an ARPU and subscriber base which are 31% and 16% respectively higher than Digi’s,” it said, adding that this placed Maxis in the leading position with a 1Q19 revenue market share of 41% vs. 31% for Celcom and 28% for Digi.

Service revenue

As mentioned above, all three telcos reported lower y-o-y service revenue. In its first quarter results statement to Bursa Malaysia, Maxis attributed the decline to a fall in prepaid revenue generating subscribers (RGS), an overall reduction in ARPU and the termination of a network sharing agreement, offset by the growth in postpaid RGS and home fibre RGS.

In a statement accompanying its first quarter results, Digi said service revenue trended lower as a result of a shift in the prepaid revenue mix with a lower reliance on traditional voice and was supported by the solid growth from its postpaid segment.

Celcom Axiata Bhd’s parent Axiata Group highlighted the 3.6% y-o-y decline in a media statement, which it said was impacted by the lower regulated mobile termination rate and wholesale revenue.

Overall subscriber base

A recent report by AffinHwang highlighted that all three telcos saw a 3.4% y-o-y decline in their combined cellular subscribers. Digi had the steepest q-o-q decline it said, followed by Axiata. The research firm said this suggested stronger competition in the price-sensitive market segment and/or declining demand from foreign workers.

“The decline in subs, coupled with a 33% cut in mobile termination rates and lower wholesale revenue dragged the telcos’ service revenue and profitability. All three telcos under our coverage reported weaker 1Q19 core net profit (-12% to -33% y-o-y) due to lower service revenue, higher opex (Axiata, Maxis) and the adoption of MFRS 16 (Digi, Axiata),” it explained. Going forward, the research firm expects the telco market to remain challenging in 2H19, mirroring that of 1Q19.

AmBank concurred that total subscribers continued to contract amid tight competition and ongoing SIM consolidation, declining q-o-q by 533,000 and 1.1 million y-o-y to 31 million.

“A major portion of the y-o-y decline stems from Celcom losing 649,000 and Digi 506,000 while Maxis increased by 51,000. These contractions stemmed purely from the prepaid segment, which lost 704,000 q-o-q and 1.9 million y-o-y to 21.8 million subscribers,” the research firm said.

AmBank noticed also that Maxis and Digi experienced y-o-y declines in prepaid ARPU during the first quarter of 2019, with Celcom’s prepaid ARPU remaining flat. All three telcos experienced y-o-y declines in postpaid ARPU, with Maxis leading in terms of postpaid and prepaid ARPU.

CGS CIMB, the research arm of CIMB Investment Bank, summarised this development nicely: “The structural decline in prepaid revenue continued this quarter, down 6.5% q-o-q (-10.2% y-o-y). The Big Three’s prepaid subs continued to fall, by a steeper 704,000/-3.1% q-o-q (4Q18: -606,000) to 21.8 million owing to persistent pre-to-postpaid migration and industry-wide SIM card consolidation.”

“Meanwhile, postpaid revenue eased 2.7% q-o-q (+4.5% y-o-y) on weaker seasonality. The Big Three’s postpaid subs grew a modest 1.8% q-o-q to 9.3 million, while ARPU dipped 3.6% q-o-q,” the research house said.

Capital expenditure breakdown

From the table above, it is clear that Maxis and Celcom have ramped up their capital expenditure (capex), while Digi seems to have pulled back a little, compared to the corresponding quarter last year.

In a statement, Maxis said that capex for the current quarter was higher compared to the year before due to its investment in its home fibre and enterprise segments’ growth.

Meanwhile, Digi said in a statement that the RM168 million capex for the first quarter was for IT and network capacity upgrades, fibre network expansion, and deployment of Network Function Virtualisation (NFV).

Analysts also appeared generally positive on the proposed Telenor Asia-Axiata merger. According to AffinHwang, the deal is in its view beneficial to the companies’ shareholders and constructive for the development of Malaysia’s telco infrastructure.

CGS CIMB believes that for Axiata, the potential Axiata-Telenor Asia merger could also see  the extraction of RM15 billion to RM20 billion in cost synergies.

AmBank meanwhile notes that the consolidation between the operations of Celcom and Digi will reduce the number of cellular competitors to four from five as the now dominant merged entity will be unlikely to initiate further price cuts that will only erode its bottom line.

“As merger synergies could take at least two years to materialise, Maxis will be free to pursue its converged fiberised solutions for its consumer, enterprise and business segments,” it concluded.