Telecommunications sector
Maintain neutral: Telecommunication companies (telcos) booked a mixed performance for the December 2014 reporting season, which is typically a seasonal high.

Axiata Group Bhd and Maxis Bhd both underperformed during the quarter, with the former’s earnings hit by Celcom’s information technology (IT) transformation challenges and the floods in the East Coast, which affected distribution channels.

The weak rupiah also crimped the contribution from PT XL Axiata Tbk, which has completed its merger with PT Axis Telekom Indonesia. The outperformers for the quarter were Telekom Malaysia (TM) and OCK Group Bhd on lower-than-expected costs and emerging regional contributions respectively.

The mobile operators continued to be plagued by structural pressure on legacy revenues (voice and short message service [SMS]), which fell 8.1% in 2014, although the 25% jump in mobile Internet revenue partially mitigated the downside.

We expect pressure on legacy revenues to continue in 2015 as the industry’s smartphone penetration is expected to trend higher on the back of a wider array of affordable smartphones in the market and the mobile operators giving more bundled data packages to spur data demand.

The telcos, generally cautious on 2015 prospects, are relatively conservative in their guidance/key performance indices for the year. 

Most have guided for low- to mid-single-digit revenue growth, building in to a certain extent the impact of the goods and services tax (GST). Generally, expectations are for the sharp decline in legacy revenues to persist in 2015. With voice revenue making up about 60% of service revenue, this could somewhat dampen overall earnings growth.

That said, the telcos are ramping up efforts to better monetise data alongside investments to improve the quality of networks and additional long-term evolution sites.

We expect competition to remain intense, as U-Mobile Sdn Bhd continues to up the ante and with TM looking to encroach into the mobile space later during the year.

We expect the sector to exhibit lacklustre growth this year due to continued pressure on voice/SMS revenues, competitive risks and a possible knee-jerk reaction to the implementation of the GST. 

The impending spectrum refarming exercise may also impact the sentiment of the sector. Axiata remains our preferred sector pick as we expect the rebound in PT XL Axiata Tbk and Celcom’s earnings in the second half of 2015 to catalyse an earnings recovery for the group. — RHB Research Institute Sdn Bhd, March 12

This article first appeared in The Edge Financial Daily, on March 13, 2015.