CIMB remains neutral on Malaysian telcos

By Sharmila Ganapathy June 7, 2018

Digi remains CIMB’s preferred pick
Maxis will continue facing challenges defending its lucrative postpaid business

CIMB remains neutral on Malaysian telcos

CIMB Investment Bank has maintained a neutral rating on the Malaysian telco sector, with Digi as its preferred pick and only ‘Add’, while it maintains ‘Hold’ ratings on Axiata Group, Maxis and Telekom Malaysia.

It cited steadier competition as the reason the mobile industry revenue will be flat or growing slightly this year compared to declines in the past three years. “However, longer term, there are still too many players and this could see a return of more aggressive competition or some form of market consolidation,” the investment bank said in a research report on June 6.

It highlighted that the Malaysian telco sector trades at a 22% premium over the Asean telco average of 17.1 times, with the Malaysian sector having a slightly inferior three-year EBITDA [earnings before interest, tax, depreciation and amortisation] of 1.7%. CIMB added that valuations should be supported by decent 2018-19 forecast dividend yields of 3.8-4.1%.

The domestic telco industry also faces key upside/downside risks, such as if competition eases or intensifies significantly. “The 700MHz spectrum award, expected by mid-year, is also a potential downside risk if smaller players win at the expense of the incumbents. For the Fixed Line business, a potential downside risk is regulatory-driven broadband price cuts,” the bank said in its report.

Postpaid and prepaid performance

Commenting on the March-May 2018 period, CIMB noted that it was quieter compared to the preceding three months in terms of postpaid market activity levels. It added that among the Big Four players, only Celcom and U Mobile released new or refreshed existing offers.

“While Celcom’s new Xpax postpaid offer looks aggressive, it is limited to youth subs (18-25 years old). Meanwhile, U Mobile’s 50% discount on Hero postpaid is only applicable for the secondary line of subs on RM70/month and above plans,” it said.

As for the prepaid market, CIMB pointed out that market activity levels remained high during the March-May period, compared to the three months before that.

“Overall competition did not take a turn for the worse and we noted some attempts at data monetisation by Celcom. Tune Talk, a mobile virtual network operator (MVNO) hosted by Celcom, launched a relatively aggressive data promotion in the quarter but its impact on the market should be limited by its distribution reach. On the IDD front, Digi and U Mobile raised headline IDD call rates to Nepal and Bangladesh,” CIMB further observed.

Overall first quarter performance and outlook

According to CIMB, the 1Q2018 mobile industry service revenue fell an estimated 3.1% quarter-on-quarter (q-o-q) and and 1.4% year-on-year (y-o-y). Prepaid revenue fell 3.9% q-o-q (-7.6% y-o-y due to seasonality, industry-wide SIM card consolidation and pre-to-postpaid migration. This was less steep than 1Q16/1Q17’s - 4.8%/-6.1% q-o-q, CIMB said.

Meanwhile, postpaid revenue eased 1.8% q-o-q (+4.6% y-o-y) on weaker seasonality. In the fixed line business, TM’s 1Q18 revenue fell 4.0% y-o-y (-11.1% q-o-q) as its Internet revenue growth was more than offset by weaker government and corporate ICT spend, CIMB added.

Among the Big Three telcos, Digi gained the most mobile revenue market share during this period, CIMB said.

“Post-MFRS 15, Maxis’s revenue market share (RMS) stood at 38.4%, Celcom at 31.1% and Digi at 30.5% in 1Q18. This is a -0.8%, +0.2% and +0.6% points q-o-q change, respectively vs. their RMS in 4Q17, on a pre-MFRS 15 basis. In terms of EBITDA, Digi’s 1Q18 market share jumped 5.3% points q-o-q to 34.4%, whilst Celcom’s dipped 4.2% points q-o-q to 20.3% and Maxis’s was down 1.2% points q-o-q to 45.3%,” the bank added.

CIMB also opined on the future of the Big Three telcos. Despite what it considered disappointing first quarter financial results from Axiata, the bank expects the latter’s core earnings per share to rebound by 52.7%/15.1% in FY19F/20F due to: 1) cessation in equity accounting for Idea's losses post its merger with Vodafone, 2) XL’s earnings recovery and 3) Robi's turnaround.

Commenting on the outlook for Digi, CIMB said: “We see modest service revenue growth in FY18-20F, led by postpaid expansion and better data monetisation on steadier competition. Digi is also targeting 1-3% operating expenditure cuts per annum over the period. Hence, we expect EBITDA to grow by 2.6%/5.5%/4.0% y-o-y in FY18F/19F/20F (FY15-17: EBITDA declines).”

“We believe Maxis will continue to face challenges in defending its lucrative postpaid business over the long run as the market moves closer towards network parity. The non-renewal of the U Mobile 3G RAN sharing contract is also a blow to its FY18-19F earnings,” the bank concluded.

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