This article first appeared in Corporate, The Edge Malaysia Weekly, on May 9 - 15, 2016.

OVER the past year, Maxis Bhd, DiGi.Com Bhd and Axiata Group Bhd have lost 17.5%, 23.7% and 14.8% of their market capitalisation respectively as investors question the sustainability of their dividend yield.

Even with the fall in their share prices, the dividend yields of Maxis, DiGi and Axiata are still low, at 3.6%, 4.77% and 4.01% respectively.

Not only are the yields relatively unattractive but there also does not appear to be any potential catalyst that can reinvigorate their growth.

After all, the Big Three are competing in a market where mobile phone penetration is around 144%, leaving little room for organic growth. On top of that, increased competition spurred by new entrants has put downward pressure on average revenue per user (ARPU). In turn, the once-enviable margins of the telecommunications companies have begun to slip.

DiGi and Celcom (which is wholly owned by Axiata) have seen their blended ARPU fall to RM42 and RM43 compared with RM52 back in 2010. That is almost a 20% decline. The only exception is Maxis, which posted ARPU of RM55 in the first quarter of this year (see chart).

Maxis’ defensive strategy for ARPU, however, has come at the cost of subscribers. The telco lost over one million subscribers over the past year. In fact, its mobile subscribers have fallen about 20% since 2010.

At least DiGi and Celcom have seen their respective subscriber bases grow about 40% to 12.34 million and 12.25 million respectively over the past year based on their latest filings with Bursa Malaysia.

But competition is not the only problem for telcos — they also have structural and legacy issues.

“All this time, the telcos have been building pipe dreams. They have been behaving like utilities, which was the case when voice was king. But today, it is all about data. You can’t be a utility. You have to be part of a network economy,” says an industry veteran.

“The introduction of over-the-top (OTT) content was a nasty curve ball that the telcos were not prepared for. Basically, anything that you can see passing through your network but cannot charge for is OTT,” he explains.

Applications and services like voice-over-internet calls, WhatsApp, Facebook, YouTube and Mudah.com are some examples of OTT content.

At the same time, telcos are facing increasing cost pressure with the ever-shortening investment cycles due to accelerating technological obsolescence.

“Back in the day, telcos could invest in technology and expect it to last 15 to 20 years. These days, they would be lucky if their investments lasted 10 years,” explains the industry veteran.

Last year, the capital expenditure for Maxis, DiGi and Celcom was RM1.3 billion, RM904 million and RM891 million respectively. That works out to 15.2%, 13.07% and 12.13% of their respective revenues. Maxis’ capex in particular was almost one third more than it was on average in the past five years (see chart).

In contrast, Thailand’s Advanced Information Service PLC spends between 18% and 22% of its revenue on capex. Even Singapore Telecommunications Ltd, which has the advantage of serving a denser, more urban population, spends about 12% of its revenue on capex annually.

At the same time, the incumbents are sitting on a substantial amount of legacy — the 2G and 3G voice-based infrastructure. For perspective, Singapore has announced plans to phase out its 2G infrastructure next year.

That said, the Big Three do have relatively modern infrastructure, at least in the urban areas. However they are unlikely to ramp up capex substantially as long as Malaysian users are not willing to pay more.

“Malaysia has relatively advanced mobile infrastructure — similar to that of some of the mature markets; however, the consumers’ spending pattern and behaviour are similar to an emerging market’s. Mobile users are not keen to spend more ringgit on data and continue to depend on WiFi,” says Avinash Sachdeva, a senior analyst at Frost & Sullivan.

Between falling ARPU and rising cost pressures in a saturated market with increasing competition, the Big Three may be hard pressed to sustain dividends at current levels.

However, it is important to note that they still have a sizeable buffer in their margins. The question is, how far down  will the “new normal” be?

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