Telecom sector expected to be stable

This article first appeared in The Edge Financial Daily, on December 10, 2018.
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Telecom sector
Maintain neutral:
There were no major new post- or prepaid headline promotions from September to November but U Mobile Sdn Bhd’s GX50/30 unlimited plans (launched in mid-June) remained on the market. The industry’s mobile revenue for the third quarter of 2018 (3Q18) eased 0.5% quarter-on-quarter (q-o-q) (-1.2% year-on-year [y-o-y]). Maxis Bhd gained 0.4/1.4 percentage points q-o-q in mobile revenue and earnings before interest, taxes, depreciation and amortisation market share to 38.9%/45.8% at Digi.Com Bhd’s and Celcom’s expense. We have stayed “neutral” on the Malaysian telco sector.

 
At Digi’s retail shops, we saw some attractive limited-time offers, likely to counter competitive pressure on the lower-end segment. For now, the market is still largely stable, but we are watching if any of the big three telcos launch low-priced fixed speed unlimited plans.

The international direct dialing segment was quiet, as only Maxis made a slight change to its mobile tariff (to Nepal).

In reaction to package revisions of Telekom Malaysia Bhd (TM)/Maxis and regulatory pressures, TIME dotCom Bhd offered its existing fibre home broadband subscribers for free two to five times of speed upgrades for the same price at end-September. Then, in October, TIME launched revised home fibre broadband plans priced at RM99/RM139 for 100Mbps/500Mbps, 34%/54% lower than before.

The mobile industry’s service revenue eased a slight 0.5% q-o-q (-1.2% y-o-y) for 3Q18, after a decent 2Q18. Prepaid revenue resumed its downtrend, -3.1% q-o-q (-7.6% y-o-y). Post-paid revenue rose 2.4% q-o-q (+3.7% y-o-y) on greater net adding. As for the fixed line business, TM’s 3Q18 revenue was stable y-o-y and q-o-q.

We have switched our top Malaysian telco pick from Digi to Axiata Group Bhd due to a strong earnings rebound in financial year 2019 forecast and a bigger upside to the share price for the latter. Malaysian telcos are trading at an 11% premium to the Asean average 2019 forecast enterprise value/operating free cash flow of 13.5 times, with decent 2018 to 2019 forecast yields of 3.5% to 3.8%. Downside risks include spectrum auctions for the 700MHz/2,600MHz, with higher-than-expected final prices and more intense competition. An upside risk is value creation from mergers and acquisitions. — CGSCIMB Research, Dec 6