Telcos’ subscriber base still dominated by prepaid users

This article first appeared in The Edge Financial Daily, on October 10, 2017.
Telcos’ subscriber base still dominated by prepaid users
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Telecommunications sector
Maintain neutral:
From Jan 1, 2018, new prepaid customers would need to provide more information during the registration process, according to the Malaysian Communications and Multimedia Commission’s (MCMC) recent statement. 

MCMC has strengthened the guidelines for prepaid registration, which will be fully enforced by Jan 1.

All users, regardless of their nationality (Malaysian or non-Malaysian), are required to register as long as they are subscribers of Malaysian prepaid services. This includes Malaysian citizens and permanent residents, foreigners (workers and students) and tourists. 

Registration is compulsory for all single prepaid mobile numbers that a user has with the respective service provider. All applicants would need to provide documents to verify their mailing address or hotel/temporary residential address. The authority is also lowering the maximum number of prepaid SIM cards (per customer/user) to five instead of 10 previously under the same service provider.

Registration must be done using secure automated platforms, such as optical character recognition application, biometrics or a MyKad reader. Photocopies of documents are not allowed and verification must be based on original documents only.

On the prepaid reload front, MCMC and service providers are still in the process of identifying the best method to implement the “reload with ID” mechanism. When the system is ready and in place, users must provide partial ID numbers to reload mobile phone credit via the platform to be determined later, according to MCMC.

While we concur with the government’s initiative, the strengthening of prepaid SIM card guidelines could lead to a tougher operating environment over the short term, especially for prepaid reload services. Users would need to provide an ID for verification before reloading, which requires incumbents to install new systems at all points of sale for document verification purposes.

The process may discourage consumers, resulting in less credit top-up and trigger another clean-up exercise in each cellco’s prepaid segment moving forward. Some prepaid users may consider converting their service to post-paid to avoid the hassle, which bodes well for cellcos in upselling value-added services and providing brand stickiness in the future.

Despite the increase in the number of post-paid subscribers, the overall subscriber base is still dominated by prepaid users. There are 71.8%/70.6%/80.9% of Maxis Bhd/Celcom (Axiata Group Bhd)/DiGi.Com Bhd subscribers (out of respective total subscriber bases of 10.4 million/9.9 million/12 million) coming from the prepaid segment and contributed 46%/about 45% to 50%/63% to their respective service revenue as of the second quarter of 2017, thus suggesting that DiGi may face tougher challenges should there be any hiccup in prepaid SIM registration/top-ups.

We made no changes to our financial year 2017 (FY17) to FY18 earnings estimates as well as the telecommunications companies’ (telcos) respective target prices (TPs). Telekom Malaysia Bhd (market perform [MP]; TP: RM6.70) remains our favourite big-cap pick for the sector, although we do not have any convincing “buy” call.

On the mobile operator front, we favour Maxis (MP; TP: RM5.90) over its peers (due to its extensive network infrastructure and signs of operational improvement in the latest quarter). We downgraded our rating on Axiata to “underperform” (from MP previously), with an unchanged sum-of-parts-driven TP of RM4.80. 

OCK Group Bhd (outperform; TP: RM1.05) remains our preferred pick among mid-cap telcos in view of its healthy cash flow on the back of an escalating recurring income trend, its ability to ride on the passive infrastructure sharing trend, and its expanding earnings before interest, taxes, depreciation and amortisation margin trend. — Kenanga Research, Oct 9