This article first appeared in The Edge Financial Daily on October 4, 2018

KUALA LUMPUR: Investors may well have more reasons to shy away from owning telecommunications (telecom) stocks following the new Pakatan Harapan-led government’s ruling that fixed broadband operators must reduce their prices, as this may impair the earnings visibility for the sector.

According to a statement issued by the Malaysian Communications and Multimedia Commission (MCMC) on Tuesday, four key telecommunication companies (telcos) namely Telekom Malaysia Bhd (TM), Maxis Bhd, Time dotCom Bhd and Celcom Axiata Bhd have reached agreements on the mandatory standard on access pricing (MSAP), which will result in reduced prices of fixed broadband.

In fact, some of the telcos had already rolled out packages which had seen prices being lowered with increased speeds before the Sept 30 deadline, the commission added.

In August, Maxis announced that it was reducing its broadband prices from a steep RM179 per month for Internet speeds up to 30Mbps to RM89 per month, and to RM129 per month for 100Mbps from RM299 per month.

TM, which was also offering RM79 per month for 30Mbps, raised the speeds from 30Mbps to 300Mbps for its RM139 per month package, and from 100Mbps to 800Mbps for its RM329 per month plan.

In the telcom sector, government policy can make a huge difference. Following the move by MCMC requiring the fixed broadband operators to cut their prices by Sept 30, this has led to rising pricing pressure, making it a major headwind for the telcom sector.

The cost structure and competition in the telcom sector are expected to remain intense, which will serve as a source of uncertainty and impairing their earnings visibility for the sector, said a local fund manager who requested anonymity.

“Companies like TM which incur heavy capital expenditure (capex) to fund their infrastructure [fibre optic fittings] will see an immediate impact on their financial performance as a result of lower profit from the broadband revenue segment while cost remains the same,” the fund manager told The Edge Financial Daily.

Telcos like Maxis that have entered the fixed broadband space by riding on TM’s high-speed broadband, meanwhile, will need to relook at their cost structure such as the fees by TM against the level of price reduction. The fund manager is advising investors to avoid the telcom sector in the near term as uncertainty to its cost structure and intense competition will continue to weigh on the sector’s earnings.

In fact, in July TM revised downwards its capex for the year, citing increasing regulatory pressures, intensifying competition and the potential revision in broadband prices.

The group’s capex for 2018 was lowered to between 20% and 22% of revenue from the earlier allocation of between 25% and 30%.

It also brought down its target for revenue growth in 2018 to -1% to a flat growth compared with a targeted 3.5% to 4% growth previously, while it set earnings before interest and taxes (Ebit) growth at about RM1 billion, which would be its lowest in eight years.

The original Ebit growth was expected to match the 2017 level of RM1.1 billion. TM also revised downwards its customer satisfaction measure to 72 from 74.

JF Apex Securities analyst Siau Li Shen, who tracks Maxis and DiGi.com Bhd, believes that the government’s initiative to lower fixed broadband prices in Malaysia will have a negative impact on Maxis’ earnings.

But the impact will be minimal, he said, as the contribution from fixed broadband business is relatively small [less than 10%] to Maxis’ total earnings.

Siau also sees the implementation of the MSAP to result in an erosion in telcos’ average revenue per user.

However, he does not expect telcos’ subscriber numbers to change much as their price reduction level is broadly in line with each other.

He is maintaining a “hold” call on Maxis and DiGi as he does not foresee any potential catalyst in which will drive the two telcos’ future earnings.

In its market strategy report on Tuesday, Kenanga Research has downgraded its telecommunications sector’s rating to “neutral” in view of the current headwind in the fixed broadband segment and lacklustre earnings outlook in the mobile space.

“Besides, valuations still appear less appealing compared with its regional peers, suggesting that foreign interests may continue to remain lacklustre in the near term,” it added.

Maxis shares closed two sen or 0.34% lower at RM5.82 yesterday, while Axiata’s share price eased one sen or 0.22% to close at RM4.62. DiGi shares ended the day five sen or 1.04% lower at RM4.77.

TM settled up one sen or 0.32% to RM3.13, while Time dotCom rose one sen or 0.12% to close at RM8.22.