Mobile industry revenue expected to be flat this year

This article first appeared in The Edge Financial Daily, on June 7, 2018.
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Telecommunications sector
Maintain neutral.
Compared to the preceding three months, March to May 2018 was a quieter period in terms of post-paid market activity levels.

Among the big four players, only Celcom and U Mobile released new or refreshed existing offers. While Celcom’s new Xpax post-paid offer looks aggressive, it is limited to youths aged 18 to 25.

Meanwhile, U Mobile’s 50% discount on Hero post-paid is only applicable for the secondary line of subs on RM70 per month and above plans.

Prepaid market activity levels remained high in March to May 2018, though quieter than the December 2017 to February 2018 period.

Overall competition did not take a turn for the worse and we noted some attempts at data monetisation by Celcom. Tune Talk, a mobile virtual network operator hosted by Celcom, launched a relatively aggressive data promotion in the quarter but its impact on the market should be limited by its distribution reach.

On the international direct dial (IDD) front, Bhd and U Mobile raised headline IDD call rates to Nepal and Bangladesh.

In the first quarter of 2018 (1Q18)’s mobile industry service revenue fell an estimated 3.1% quarter-on-quarter (q-o-q) (-1.4% year-on-year [y-o-y]).

Prepaid revenue fell 3.9% q-o-q (-7.6% y-o-y), due to seasonality, industry-wide SIM card consolidation and pre-to-post-paid migration. This was less steep than 1Q16/1Q17’s -4.8%/-6.1% q-o-q.

Post-paid revenue eased 1.8% q-o-q (+4.6% y-o-y) on weaker seasonality. In the fixed line business, Telekom Malaysia Bhd’s (TM) 1QFY18 revenue fell 4% y-o-y (-11.1% q-o-q) as its Internet revenue growth was more than offset by weaker government and corporate information and communication technology spend.

Post-MFRS 15, Maxis Bhd’s revenue market share (RMS) stood at 38.4%, Celcom at 31.1% and Digi at 30.5% in 1Q18. This is a -0.8%, +0.2% and +0.6% points q-o-q change, respectively versus their RMS in 4Q17, on a pre-MFRS 15 basis.

In terms of earnings before interest, taxes, depreciation and amortisation, Digi’s 1Q18 market share jumped 5.3% points q-o-q to 34.4%, while Celcom’s dipped 4.2% points q-o-q to 20.3%, and Maxis’ was down 1.2% points q-o-q to 45.3%.

Given the steadier competition, we expect mobile industry revenue to be flat or growing slightly this year, versus declines in the past three years.

Malaysian telcos trade at a 22% premium to the Asean average 2018 enterprise value against operating free cash flow of 17.1 times, supported by decent 2018 to 2019 yields of 3.8% to 4.1%.

Our preferred pick and only “add” is Digi. We have “hold” ratings on Axiata Group Bhd, Maxis and TM. Key upside/downside risks are competition eases/intensifies significantly. — CGSCIMB Research, June 5