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This article first appeared in The Edge Financial Daily on October 8, 2018

Telecommunications sector
Downgrade to underweight:
Given heightened regulatory pressure amid an environment in which competition is not likely to abate anytime soon, we reckon that the operating landscape for both mobile and fixed-line operators will continue to be challenging. In the past, the fixed-line broadband market had been nonchalant but with the implementation of mandatory standard access pricing (MSAP) following the change of federal government in May 2018, this segment has since been hit by lower margins and greater competition. The mobile segment has gone through a price war in recent years but judging from the relatively high profit margins enjoyed by operators, we believe there is still room for further decline in prices. In view of the unexciting earnings growth prospects, higher operating risk and lower dividend, we downgrade the telecommunications sector to “underweight”.

Following the new government’s call to bring forth more affordable broadband services through the implementation of the MSAP, wholesale prices for network services are expected to be reduced by 8.7% to 12.1% between 2018 and 2020. According to the communications and multimedia ministry, the MSAP should translate into some 25% decline in retail broadband prices by end 2018. As the national telcom service provider, Telekom Malaysia Bhd (TM) currently monopolises the fixed-line fibre network but lower wholesale prices as well as the possible opening of Tenaga Nasional Bhd’s (TNB) fibre network could mean greater competition in the future.

Price competition that started back in 2015 has led to lower profit for most telcos. Despite this, we are of the view that overall average revenue per user is not likely to improve but instead, may continue its downward trend, either due to market forces or regulatory pressure. In an environment of falling revenues, cost optimisation will be the key for players to strive in this challenging telcom industry. DiGi.com Bhd and Maxis Bhd have proven track records in cost management while TM and Axiata Group Bhd are high-cost operators. This could also mean that there is limited scope for DiGi and Maxis to extract greater cost efficiency going forward.

Given heightened regulatory risk amid an environment in which competition is not likely to abate anytime soon, we reckon that the operating landscape for both mobile and fixed-line operators is expected to remain challenging. Revenues are projected to fall while the scope to improve on cost efficiency is limited. We downgrade our ratings on Maxis and DiGi to “underperform” and “neutral” with a revised target price (TP) of RM5.18 and RM4.80 respectively.

However, our “neutral” calls for Axiata and TM remain unchanged but with TPs reduced to RM4.54 and RM3.40 respectively. We note that there is downside to Axiata should it engage in a bidding war for M1 Ltd, Axiata’s associated company in Singapore. — PublicInvest Research, Oct 5

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