Monday, January 30

Malaysia’s big three telco could see slight rebound in 2018

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KUCHING: Malaysia’s three major telecommunications companies (telco) could see a slight growth in 2018 after four consecutive years of decline.

In a report, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) opined, “Given the sequentially improving mobile revenue trends in 2017, we expect industry revenue to revert back to a small growth in 2018 from a low base.

“We expect the overall degree of competition to remain relatively rational, with each of the Big 3 (namely Axiata Group Bhd, Digi.com Bhd, and Maxis Bhd) seeking to preserve average revenue per users (ARPU) as much as possible.

“Unlike 2017 when a significant proportion of the street was bearish, the expectation of a relatively stable 2018 mobile market appears largely consensus.”

It further pointed out that while mobile revenue is poised to decline for the fourth consecutive year in 2017, the quarterly trends point to a sequentially improving operating environment.

“The revenue weakness largely stemmed from Digi (9M17 service revenue was down 5.8 per cent y-o-y) following a strategy shift in 1Q17 to deprioritise SIM sales and IDD voice.

“Encouragingly, quarterly revenue trends for both Digi and the Big 3 have been on a sequential uptrend since. In addition, Big 3 cumulative earnings before interest, tax, depreciation, and amortisation (EBITDA) is also poised for growth in 2017, a consequence of cost optimisation initiatives by all telcos,” it added.

The research team said, “Given the sequentially improving mobile revenue trends in 2017, we expect industry revenue to revert back to a small growth in 2018 (an increase of two per cent) from a low base.”

On products, Maybank IB Research noted that both Maxis and Celcom have maintained their pricing premium, while focusing on enhancing miscellaneous services such as handsets incentives.

“Digi jumped onto the ‘unlimited data’ bandwagon in 2017 (following UMobile and Webe), but has kept price points of such plans high, while also throttling speeds for the lower-priced of such plans. UMobile appears to have reached a floor with regards to price points, and it also has to contend with its network srollout following its receipt of the 900/1800MHz spectrum,” it added.

Cost optimisation has also been a common theme for 2017 for all operators, with each operator focusing on differing cost items, the research team said.

“Celcom achieved the greatest savings in direct expenses (reversal of previously incurred costs), Maxis in marketing (more targeted and digital-based advertising), and Digi in traffic charges (partly stemming from the de-emphasis on IDD calls).

“This has resulted in all operators achieving circa one percentage point y-o-y expansion in EBITDA margin as at 9M17. Big 3 cumulative EBITDA is up circa one per cent y-o-y in the same period,” it said.

Meanwhile, it noted that depreciation and amortisation also continued to climb as a result of telcos’ elevated capital expenditure (capex) in recent years, and the amortisation of the 900/1800MHz spectrum fees beginning of the second half of 2017 (2H17). Consequently, it expected the Big 3 EBIT is poised to decline further in 2017, albeit by a lower rate.

As for issues on spectrum fees, Maybank IB Research noted that spectrum fees are expected to remain manageable.

“There were previous concerns of potentially hefty spectrum fees for the telcos (in lieu of the 700Mhz re-farming), but these have since dissipated.

“Details of the tender for the 700MHz band were announced in October 2017, with a total of 40MHz pairs being made available to telcos at a very reasonable price. The total cost for a 5Mhz pair in the 700Mhz band is RM494 million, slightly lower than the RM500 million for the 900Mhz band. Given the reasonable pricing, all incumbents are likely to participate in the tender, in our view,” it opined.

Assuming each operator gets allocated a 10Mhz pair, it expected the incremental impact to gearing to remain manageable.

“We estimate net-debt-to-EBITDA of Digi to rise by 15 percentage points, and that of Maxis and Axiata by less than 10 percentage points,” it added.

Meanwhile, it noted that both the 2600MHz and 2100MHz bands would likely be extended for two years with no incremental upfront fee.

“These are positive for the balance sheet of mobile operators, who are unlikely to require further equity-raising in our view (recall Maxis had in Jul 2017 raised RM1.7 billion from a primary placement exercise),” it added.

As for the telco sector’s retail segment, Maybank IB Research said, Telekom Malaysia Bhd (TM) and Time Dotcom Bhd (TDC) have alluded to incrementally more challenging operating conditions in the enterprise and wholesale segments.

“Both operators continue to look to the retail fixed broadband segment to drive growth. TM’s fibre broadband product (presently offered with an IPTV add-on) has enjoyed healthy subscriber momentum over the years, and we expect this to continue in 2018. TDC meanwhile, has found its niche in urban high-rise with its high-speed, no frills product, and is coming from a low base,” it said.

Overall, the research team pegged a ‘neutral’ call on the sector.