No reprieve seen yet for telcos

This article first appeared in The Edge Financial Daily, on January 9, 2019.
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KUALA LUMPUR: It has been over seven months since Communications and Multimedia Minister Gobind Singh Deo first clocked in at the ministry’s office in Putrajaya, yet analysts continue to view regulatory risk as a concern for the telecommunications (telco) industry, along with the sector’s inherent risk of competition.

“We are neutral on the sector as we think the industry will continue to be challenging in 2019 due to regulatory risk and usual competition,” JF Apex Securities Bhd analyst Lee Cherng Wee told The Edge Financial Daily.

All telco counters on Bursa Malaysia ended 2018 with lower share prices. In particular, broadband giant Telekom Malaysia Bhd’s (TM) stocks were severely hit after Gobind announced the government’s demand for higher Internet speed with lower prices in the country.

“For TM, which was bashed down in 2018, we have a ‘hold’ call because there is no catalyst for upside, and they have slashed dividends. [So] unless there are earnings surprises ...,” Lee said.

For mobile network operators (MNOs), Lee expects them to remain cost-focused and focussed on improving cost efficiency this year.

“Our top pick is Axiata Group Bhd, with a target price of RM4.95, as there are capital upside due to its exposure to the Asian region, and turnarounds at PT XL Axiata Tbk and Celcom Axiata Bhd. Dividend is also expected to improve,” he said.

As for Digi.Com Bhd and Maxis Bhd, Lee said, JF Apex has them on ‘hold’ “as their businesses are limited to local subscribers and dividends are not attractive”.

Meanwhile, MIDF Research analyst, Martin Foo, said the government’s move to break TM’s monopoly in the broadband market is expected to intensify competition in this space.

“Tenaga Nasional Bhd is said to be launching its broadband package offering in January. We expect the new offering will be competitive to existing Unifi’s offerings with the aim to gain market share.

“Besides, there were news which reported that several foreign broadband players have expressed their interests to venture into Malaysia, so not much of good news, and average revenue per user is not expected to be good as well due to the MSAP (mandatory standard on access pricing). So TM has to adjust to the new environment in 2019,” he said.

MSAP is a price ceiling that wholesale network providers can charge other telco players who seek access to high speed broadband.

Foo said while MNOs’ input cost is less with the MSAP, their share prices remain under pressure because of continuous competition — which is especially true for DiGi, as competition is more intense at the lower price range segment, where price sensitivity is higher.

“DiGi and U Mobile Sdn Bhd will see their competition intensify. For Maxis and Celcom Axiata, they are aiming for the upmarkets, with different price points, [so] their impact is lower.

“Having said that, our top pick is still DiGi. Because of the affordability of their packages, we believe they could attract more subscribers to their postpaid segment, while prepaid remains tough. Overall, we forecast earnings growth for all telco players, except for TM,” said Foo.

Hong Leong Investment Bank analyst Tan J Young said the telco industry should be muted in 2019 due to the lack of positive catalysts.

Tan’s top pick is Time dotCom Bhd, as he views the stock as having the steadiest performance by declining the least in 2018.

Unlike TM, Tan said Time dotCom is not as negatively affected by the MSAP as it is not an access provider to rivals in the retail market.

“As such, price pressure should not be intense. On the contrary, the cellular companies (cellcos) should be trumpeting this move (MSAP implementation) as a cost-effective wholesale fibre would allow cellcos to reduce expenditure on backhaul high-speed transmission — a paramount ingredient for the success of fourth generation and beyond,” he said.

In his note to investors in December, Maybank IB Research analyst Tan Chi Wei said the main downside risk for MNOs revolves around the emergence of a serious price war, particularly if one of the Big Three — Maxis, Digi and Celcom Axiata — starts to reduce prices significantly.

“Meanwhile, regulatory scrutiny would likely shift towards the mobile space, where we believe the overall regulatory pressure would be substantially more benign (relative to fixed line broadband).

“[but] we think it is unlikely that the minister would exert downward pressure on price points, given that he has previously expressed his satisfaction with mobile price trends and competitive intensity,” he added.