AllianceDBS foresees flattish outlook for telco sector

• Voice and SMS continue to be cannibalised by rising adoption of data
• Decent dividend yields expected from incumbent telcos

BASED on guidance given by Malaysian mobile operators, research house AllianceDBS expects industry service revenue to either be flat or decline by a low single digit in 2018 as voice and SMS continue to be cannibalised by the rising adoption of data.

Total service revenue for the mobile incumbents fell by 1% in 2017, the research house noted. “This was solely attributed to DiGi (-5%) due to the sharp decline in its prepaid segment, while Maxis and Celcom were less affected and managed to record marginal growth of 0.8% and 0.5% respectively.”

It added that continued SIM consolidation and prepaid-to-postpaid migration remained the key underlying trend for the industry in 2017, leading to the falling mobile penetration rate.

In a telco report on March 12, AllianceDBS noted that the prepaid market should still be challenging for DiGi in 2018 given the headwinds in the migrant worker segment, while Maxis will suffer some revenue loss from the complete termination of its network-sharing agreement with U Mobile by the end of the year.

The research house said that Celcom will focus more on cost-optimisation initiatives in 2018 in order to improve its EBITDA margin which is below peers. AllianceDBS also expects the award of the 700MHz spectrum to be announced in 2H18, with the three mobile incumbents getting an equal share (2x10 MHz).

AllianceDBS also pointed out that the incumbents are experimenting with digital mobile virtual network operators (MVNOs). “All the three mobile incumbents have launched their respective digital mobile services recently, but all these are operating separately as MVNOs under different brands.

“This is perhaps to avoid cannibalising their existing subscriber bases and also to serve as ‘testing platforms’ to implement new innovative ideas. TM has also introduced a digital-driven prepaid mobile offering (called Unifi Mobile) where everything from SIM registration process to account management is done online via its mobile@unifi app,” it said.

According to the research house, given the stable outlook and lower risks on spectrum in 2018, it believes the share prices of Malaysian telcos will continue to be well supported by ample domestic liquidity, even though valuations are at a premium relative to regional peers.

“We prefer fixed-line operators due to their better growth prospects, with TM being our only Buy call. The current weakness in TM's share price, which could be due to uncertainties over GE14, offers a good opportunity to accumulate,” AllianceDBS said.

“We remain optimistic that the rollout of the High-Speed Broadband Phase 2 (HSBB2) project, Sub Urban Broadband (SUBB) project, and Unifi Mobile services (previously webe) would drive the long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas,” it added.

The research house also expects decent divided yields from the incumbent telcos. “Domestic-focused operators such as DiGi and Maxis are trading at around 11.6-13.3 times CY18 EV [enterprise value]/EBITDA, a premium relative to the regional average of 7.8 times. Given the ample domestic liquidity, we believe the premium valuations can be sustained as long as dividend yields remain decent and backed by strong free cashflow generation,” it said.

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