Consolidation possibilities still on for telecommunications sector, say analysts

Consolidation possibilities still on for telecommunications sector, say analysts
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KUALA LUMPUR (March 19): Despite the collaboration among telecommunications companies (telcos) Celcom Axiata Bhd, Digi Telecommunications Sdn Bhd and Maxis Bhd to develop and share fibre infrastructure, analysts opined that consolidation possibilities will continue amid forthcoming stiff competitive mobile space.

Notwithstanding the agreement among the telcos, declining yields amid intense competition among themselves, further exacerbated by U Mobile, unifi Mobile and mobile virtual network operators (MVNOs), could still drive operators to seek consolidation to further reduce cost, secure economies of scale and reduce rivalry, according to AmInvestment Research. 

“Even though the MCMC (Malaysian Communication and Multimedia Commission) has shown a preference for maintaining competitive pressure to reduce broadband prices for consumers, we maintain our view that the industry’s stagnant revenue trajectory could eventually drive the sector towards more merger and acquisition (M&A) activities,” said its analyst Alex Goh in a note today. 

Goh said AmInvestment Research maintained its "overweight" call on the telecommunications sector with ‘buy’ calls on Telekom Malaysia Bhd (TM), which has shown significant cost improvements together with more compelling dividend yields, while Axiata Group Bhd offers bargain enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA). 

He added that these valuations are even more compelling given the companies' environmental, social and corporate governance (ESG) scoring of three to four stars. 

Meanwhile, Kenanga Research said it would not be surprised should M&A activity emerge in the industry to consolidate infrastructure and the subscriber base as well as to save cost through synergies. 

“There have been rumors of Digi’s parent Telenor and Celcom reigniting discussions of a possible merger. While a merger may bring strategic benefits, we believe that the reasons for the failed discussions [previously], which included 'complexities' across 14 entities and nine regions, disagreement over equity share, and relocation of the combined entity from Malaysia to Singapore, may continue to prevent the deal from going through,” said its analyst Lim Khai Xhiang. 

Moreover, the analyst said the collaboration among Maxis, Digi and Celcom did not come as a surprise, but he still likes it as the collaboration prevents duplicating capital expenditure (capex) and infrastructure. 

“While the MNOs (mobile network operators) could benefit from reduced capex, continued price competition in mobile offerings, particularly if network quality is similar, could weigh on profitability. Thus, this news does not affect our existing calls. 

“We keep our 'MP' (market perform) calls on Maxis, Digi and OCK [Group Bhd]. Our top pick continues to be Axiata ('OP' [outperform]; TP: RM4.40) for the encouraging recovery of its regional OpCos (operating companies), cost-cutting measures and high-dividend goal. We maintain our 'OP' call on TM (TP: RM6.85) for long-term prospects for its cloud and data centre segments. 

“We do not believe that this collaboration is a threat to TM’s fibre assets as the MNOs are likely to roll out fibre in areas without fibre, in our view, as the aim is to avoid duplication of fibre infrastructure after all,” he added. 

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