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This article first appeared in The Edge Financial Daily on January 29, 2020

KUALA LUMPUR: The telecommunications sector has always been competitive, but with smaller players incessantly snapping at the heels of the three largest incumbents in the market, things are expected to get more intense this year. More so with the expected listing of U Mobile Sdn Bhd.

As it is, Axiata Group Bhd, Maxis Bhd and DiGi.Com Bhd — which are collectively known as the country’s three biggest cellular services providers (cellcos) or the Big Three — have continued to cede market share to smaller peers last year, including U Mobile, said TA Securitis analyst Wilson Loo in his 2020 annual strategy report on the sector.

“We do not discount the possibility of heightened competition to defend [their] respective subscriber base. In all, we maintain our ‘underweight’ stance on the telco sector due to the subdued near-term growth prospects of the local telco sector, pressured by Malaysia’s high mobile penetration rate and competitive pressures, especially from smaller cellcos,” he said.

When contacted, MIDF Research analyst Martin Foo said U Mobile’s initial public offering, if it materialises, will result in the adoption of “more aggressive” pricing strategies among telco players.

“This (the level of aggression) will also depend on the telcos’ ability to reduce cost, which will give them more room to compete more effectively. Apart from this, differentiation will be from the [quality] level of services, and the [attractiveness of] value-added services on offer,” he said.

The attempt to once again merge certain Axiata operations with that of Norwegian telco, Telenor ASA, will also have a big impact on the telco industry. Bloomberg recently reported that Khazanah Nasional has revived negotiations with Telenor, which owns a 49% equity stake in DiGi, for a potential deal involving Axiata.

In a note to investors on Jan 20, AmInvestment Bank Research analyst Alex Goh said the merger, if it materialises, could be a potential rerating catalyst given the synergies arising from the consolidation while mitigating competition among the cellular operators.

“We note that the share prices of telco stocks have appreciated recently due to the rising trend of collaboration among the potential 5G mobile operators. However, pending further developments on this front, we maintain our ‘neutral’ outlook on the sector for now, given the still substantive 5G (fifth-generation) capex requirements against the backdrop of government-targeted fiberised average revenue per user (Arpu) reductions under the National Fiberisation and Connectivity Plan (NFCP),” Goh said.

Goh also noted that the telco sector can be de-rated on resumption of revenue declines against the backdrop of escalated mobile price war intensification and sharp drops in fixed broadband prices next year, driven by NFCP prerogatives.

 

‘Higher capital spending’

Goh is also cautious about the possibility of “higher-than-expected increases in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G roll-outs”.

That means besides having to compete to maintain revenues, incumbents will likely incur more capital expenditure (capex) for 5G spectrum procurement from the government this year. The Malaysian Communications and Multimedia Commission is expected to commence assignment of the 700MHz, 2300MHZ and 2600MHz spectrum bands this year.

While the new spectrum will reduce operating expenditure, MIDF Research’s Foo said the effect will not be immediate. “In the immediate term, the impact will be on the balance sheet (cash reserve) as huge capex will be required for the payment of the spectrum,” he said.

But the fixed broadband segment’s backhaul role in the transfer of data at high speeds — a mandatory prerequisite in 5G deployment — has become even more critical, said Hong Leong Investment Bank Research analyst Tan J Young.

Hence, he is upbeat about fixed broadband providers like Telekom Malaysia Bhd (TM) and TIME dotCom Bhd. “Demand will spike not only in terms of capacity, but also coverage in order to compensate for 5G spectrum shortcomings in propagation,” he said.

“A surge in wholesale bandwidth demand will boost margins even under the Mandatory Standard On Access Pricing regime. Also, new fibre roll-outs are commercially negotiated (prices not regulated) and fixed telcos will command more lucrative returns,” he added.

TA Securities’ Loo, however, noted that TM’s strong share price performance in 2019 was largely driven by positive results of its cost optimisation initiatives.

The group’s profit is expected to decline in 2020 due to lower Internet revenue on lower Streamyx Arpu, and net revenue churns among fixed broadband subscribers, he said. Net revenue churn refers to the percentage of revenue lost from existing customers in a period.

Earnings growth for the telco sector this year will largely be driven by Axiata and, to a lesser extent, by DiGi, he said. Maxis, on the other hand, will likely see slight earnings contraction due to the absence of wholesale revenue from its 3G radio access network sharing alliance with U Mobile.

“For Axiata, we attribute its share price appreciation [last year] to the sustained traction at most of its opcos (operating companies), especially PT XL Axiata Tbk and Robi Axiata Ltd, which turned profitable during the year.

“Meanwhile, DiGi and Maxis’ lacklustre share price performance, in our view, reflects the market’s concerns about Malaysia’s challenging operating landscape, with its high mobile penetration rate and tight competition limiting room for service revenue growth,” Loo added.

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