This article first appeared in The Edge Financial Daily on July 5, 2019
Telecommunications sector
Maintain overweight: The Edge Malaysia weekly reported recently that Axiata Digital Services has expressed interest in pursuing a digital banking licence based on its Qredit platform, which currently offers small loans to micro-merchants in Malaysia and Indonesia and the Boost app, which provides e-wallet and e-payment services.
We note that Digi has also been offering customised digital solutions for businesses such as e-wallet Vcash and iFleet, which may gain momentum following the realisation of the proposed Axiata-Telenor Asia merger.
However, we do not expect any meaningful earnings contribution in the foreseeable future given the indeterminate gestation period for start-up digital services.
Prospects for the sector have structurally transformed with the proposed merger amid rising evidence of cost optimisation benefits for Telekom Malaysia Bhd (TM). The consolidation between operations of Celcom and Digi will reduce the number of cellular competitors to four from five as the now dominant merged entity will unlikely initiate further price cuts that will only erode its bottom line.
The Telenor-Axiata entity’s combined US$6 billion (RM24.78 billion) capital expenditure could be optimised while procurement synergies could lead to lower overall costs together with the higher market capitalisation of the merged entity offering an opportunity for Khazanah Nasional to monetise its 40% equity stake in Axiata.
Depending on the Malaysian Communications and Multimedia Commission’s decision regarding the reduction of competition in the cellular segment, the merged entity is envisaged to secure five-year synergies up to RM15 billion to RM20 billion in its present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale. This represents 21% to 29% of the potential market capitalisation of the merged entity.
Separately, TM’s cost optimisation drives could be heightened over the next few quarters, spurring growing market conviction that will catalyse further revaluation cycles which has caused its share price to surge 50% since its first quarter of financial year 2019 (1QFY19) outperformance.
As the merger synergies for Telenor-Axiata entity could take at least two years to materialise, we expect Maxis to be free to aggressively pursue its converged fiberised solutions for its consumers, enterprise and business segments, allowing the group to revitalise its revenue growth momentum.
Currently, Maxis is offering its 4G LTE mobile network as a backup Internet for its “Prime” customers. Available at a minimum RM187 per month, MaxisOne Prime combines Maxis post-paid and fibre broadband service into a single plan which gives “Prime” customers a 4G LTE dongle to be used together with a fibre modem at home, allowing continued connectivity to the Internet even when their home fibre service is down/offline.
The government-linked company restructuring story has been highlighted by TM demonstrating a surprisingly sharp drop in 1QFY19 operating costs, supported by the group’s transformative performance improvement programme. This in an ongoing initiative that has been carried out since mid-2018, leading to cost optimisation in unifi mobile’s domestic roaming, contract renegotiation, marketing, business procurement and manpower.
We do not expect any significant cost escalation from the appointment of TM, Celcom and Maxis as second half of 2019 interim Internet service providers for 10,000 schools nationwide after the expiry of YTL Communications’ 1BestariNet phase 2, given the existing established network infrastructure.
Communications and Multimedia Minister Gobind Singh Deo indicated that high-speed broadband prices will not be further cut this year, TM earnings prospects have stabilised with all of TM’s Streamyx and unifi existing customers having been upgraded to faster speed packages while experiencing minimal down-trading activities together with manageable revenue declines so far.
Total subscribers continue to contract amid tight competition and ongoing SIM consolidation, declining quarter-on-quarter (q-o-q) by 533,000 and 1.1 million year-on-year (y-o-y) to 31 million. A major portion of the y-o-y decline stems from Celcom losing 649,000 and Digi 506,000 while Maxis increased by 51,000. These contractions stemmed purely from the prepaid segment, which lost 704,000 q-o-q and 1.9 million y-o-y to 21.8 million subscribers. — AmInvestment Bank, July 4