Consolidation still in play in telecommunications sector — AmInvestment

Consolidation still in play in telecommunications sector — AmInvestment
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KUALA LUMPUR (Jan 14): The Malaysian telecommunications industry’s stagnant revenue will continue to drive consolidation, according to AmInvestment Bank Research.

Its analyst Alex Goh today said declining data yields, new fifth-generation (5G) spectrum fees and capex pressure are likely to drive players to seek consolidation among themselves to reduce cost, secure economies of scale and reduce rivalry.

“While the MCMC (Malaysian Communications and Multimedia Commission) has shown a preference for maintaining competitive pressure to provide reduced broadband prices for consumers, we view that the industry’s stagnant revenue trajectory will eventually drive the sector towards more merger and acquisition (M&A) activities, which was viewed as inevitable during Axiata [Group Bhd]’s analyst briefing last month,” he said in a note today.

Goh also noted the reimposition of the movement control order (MCO 2.0) could have a partly mitigated impact on cellular operators (celcos), which experienced lower prepaid subscriber acquisitions with the temporary closure of physical outlets and suspension of postpaid accounts for non-payment back in March to April last year.

“From our channel checks, operators remain cautious about further stress on small and medium businesses amid declining overall disposable income from lockdowns and slower economic activities,” he said.

However, he said, celcos are more prepared for this round and also hopeful of a partly mitigated impact from subscriber renewals and subscriptions as the previous lockdown had encouraged more consumers to embrace digital platforms and online payment channels.

Additionally, he said, MCO 2.0 is less onerous given the imposition on less states versus the first lockdown, while the free 1GB data offer for productivity and education had been extended indefinitely since last month.

He opined that this is unlikely to significantly increase operators’ cost structure while driving higher work-from-home data usage.

“In our view, the larger concern for operators is the unrelenting competition in the mobile and fixed line business,” he said.

He also noted that cellular net subscribers decreased by 188,000 to 30.2 million in the third quarter of 2020 (3Q20) after registering a surprisingly strong 121,000 quarter-on-quarter (q-o-q) increase in 2Q20.

Goh maintained his "overweight" call on the sector. He has a "buy" call on Telekom Malaysia Bhd (TM) as it has shown significant cost improvements with more compelling dividend yields.

He also has a "buy" call on Axiata Group Bhd as it offers bargain enterprise value to its earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies.

“These valuations are even more compelling given their three- to four-star rating for ESG (environmental, social, and governance) compliance on the FTSE4Good Index,” he added.

Surin Murugiah