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Telecommunications Sector 
Maintain “neutral”
: Cellular companies (Cellcos) are bracing for more headwinds. Going into 2015, cellcos may continue to face headwinds in monetising data while legacy revenues (SMS and voice) should remain under pressure on the back of higher data uptake and smartphone adoption. 

Competition should remain intense, especially with unlisted U-Mobile upping the ante and Telekom Malaysia Bhd (TM) rolling out a converged LTE mobile offering following its acquisition of P1. 

Thus far, the growth in data revenue — stemming from the accelerating growth in mobile revenue — has only been able to partially offset the loss in traditional voice revenue as the latter still makes up almost two-thirds of industry service revenue.

The introduction of the goods and services tax (GST) is generally seen as positive for the cellcos, especially those with larger exposure to the prepaid segment, such as DiGi.Com Bhd and Maxis Bhd. The cost savings from the 6% service tax pass-through should bolster cellcos’ earnings by 2% to 6% for financial year 2015 (FY15), if all factors are unchanged. That said, the actual cost savings could come in lower over the short term as there could be a drop in consumption due to the anticipated slowdown in overall consumer spending post GST and given the price-sensitive nature of most prepaid subscribers.

There is still little visibility on the timeline of the spectrum refarming as there have been no updates on the matter. Hence, we believe the exercise may likely only take place in the second half of 2015 at the earliest. We see DiGi as a likely beneficiary of the exercise as it currently has limited 900Mhz spectrum and needs more to re-farm the 1,800Mhz spectrum for LTE. 

That said, as the structure of the re-farming exercise has yet to be decided upon, the spectrum tenders could be opened up to other new and emerging players, and this could potentially threaten the positions of the current players in the sector.

We believe that at this juncture, most of the upside of the sector (that is GST) has been priced in and valuations already look fair. The current unfavourable market outlook and the uneven global macroeconomic recovery may benefit the sector, given its defensive nature and decent dividend yields. Axiata Group Bhd is our preferred pick. — RHB Research, Dec 23

 

This article first appeared in The Edge Financial Daily, on December 24, 2014.

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