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This article first appeared in The Edge Financial Daily on December 20, 2018

Telecommunications sector
Maintain neutral on the sector:
Regulatory overhang remains a key sector risk, highlighted by the Pakatan Harapan government’s commitment to resume the former government’s agenda to “double the speed at half the price”.

The new Malaysian Communications and Multimedia Commission (MCMC) chairman, Al-Ishsal Ishak, who was appointed on Oct 1 this year, has warned that he would ensure the government’s objective to provide high-speed broadband nationwide is achieved with some operators likely to be reprimanded over regulatory breaches.

Additionally, the government’s intention to reduce Khazanah Nasional’s holdings in government-linked companies (GLCs) casts shadows of a share overhang.

The impact of lower fixed broadband average revenue per user (Arpu)s has been deferred to fourth quarter of financial year 2018 (4QFY18). Even though Telekom Malaysia (TM)’s 3QFY18 results showed a surprisingly resilient unifi Arpu, we do not expect this segment to defy gravity with the almost 40% price cut in its 30Mbps plan to RM79 per month, which was announced in early July and expected to be gradually implemented by the end of this year.

As such, we expect customers’ gradual migration towards the more affordable government-mandated plans to substantively cut TM’s immediate earnings.

With Maxis riding along with TM’s price cuts, we expect lower margins from fixed broadband, as forewarned by Time DotCom chief executive officer despite registering a strong 3QFY18 performance.

As revenue growth increasingly faces headwinds, telcos are increasingly focused on higher value customers, optimising existing assets and drive cost efficiencies via lower tower rental reversion rates, single supplier sourcing for bulk discounts and digitalisation initiatives.

Overall, 3Q18 mobile subscribers declined 177,000 quarter-on-quarter (q-o-q) and 781,000 year-on-year (y-o-y) to 32 million primarily in the prepaid segment amid tight competition and ongoing SIM consolidation.

Since the beginning of this year, Celcom registered the largest decline of 316,000 followed by Maxis’ 120,000. DiGi managed to grow by 57,000 as post-paid accretion more than offset the prepaid loss.

However, cumulative nine months of 2018 sector revenue was flattish as the decline in prepaid subscribers was offset by the higher value post-paid segment, which expanded by 155,000 q-o-q and 406,000 y-o-y in 3Q18 to 8.7 million.

A sector rerating requires catalysts for stronger revenue growth prospects demonstrated by subscriber, Arpu and margin expansions.

As the global landscape for rapid data trajectory is driven by lower price plans and increasingly expensive capital expenditure rollouts to provide wider fixed broadband and 4G capabilities, coverage and service quality, any significant organic revenue or margin growth improvement is unlikely over the next 12 months.

We maintain a “neutral” call given the continued intense competition in both the mobile and fixed broadband markets. — AmInvestment Bank, Dec 19

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