Upgrading the playing field for telco

Malaysia’s telecommunication industry’s market equilibrium is shifting as major telecommunication companies (telcos) undergo key changes to its operational structures to emerge from the market’s current lull.

As demand rises for more affordable packages and faster internet speeds, telcos are making more significant changes to their operations to beat the competition and gain a larger share of the market.

According to the Malaysian Communications and Multimedia Commission (MCMC), Malaysia’s mobile-cellular penetration rates in the first quarter of 2019 (1Q19) rose to an average 131.4 per cent from 130.2 per cent per 100 inhabitants in 2018 while broadband penetration rate is at 127.1 per cent per 100 inhabitants compared with 121.1 per cent per 100 inhabitants in 2018.

Malaysia’s postpaid subscriptions have also risen to 12 million in 1Q19 from 11.6 million in 2018 while prepaid subscriptions rose 30.9 million from 30.8 million in 2018.

With this rise in the market, major telcos such as Digi.com Bhd and Axiata are making a drastic changes as both companies are looking into the possibility of a massive merger which could capture a larger share of the market.

The move is also expected to significantly impact other players in the field.

“As the mobile operators continue its strategies to attract more postpaid subscribers, we expect the postpaid market would continue to grow steadily,” MIDF Amanah Investment Bank Bhd’s research team (MIDF Research) said.

“The prepaid market continues shrunk as seen in the latest 1Q19 earnings announcement. Prepaid service providers under coverage recorded smaller base of prepaid user base due to SIM consolidation and switch to postpaid packages.

“Apart from dwindling prepaid user base, the revenue is also affected by lower traditional voice usage and revision in interconnect rate.

“Consequently, there is higher mix of internet revenue due to higher usage. We expect the trend to remain in 3Q19 in-tandem with the favourable take up rate of entry level postpaid plan.”

As for the fixed broadband market, Telekom Malaysia Bhd (TM) is in the midst of its cost cutting strategy introduced last year. The impact is expected to be recorded this year.

“TM has been intensifying its effort to cut operating cost. This has been visible as seen in the 1Q19 results announcement. To recall, TM managed to reduce its opex/revenue ratio to 82.7 per cent from 91.4 per cent as at 1FY18, leading to a14.3 per cent year-on-year (y-o-y) reductions in quarterly cost.

“We view that the effort is warranted given the competitive fixed broadband market which make it difficult to grow the revenue. Moving forward, we are confident that the group is able to maintain the trend. We view that leaner cost structure would assist company to be more agile in adapting to market demand,” MIDF Research said.

Meanwhile, more cellular companies (celcos) are also moving into fiberised solutions to gain an advantage against other players in the market.

In a report, the research team at AmInvestment Bank Bhd (AmInvestment) highlighted that Maxis, which is already an established player in the fiberised solutions via the leasing of TM’s High Speed Broadband network, is aiming to more aggressively penetrate the business and enterprise markets by offering converged offerings.

It added that Axiata’s Celcom has also started offering home fibre solutions in Sabah while Digi is testing the waters at the Jasin pilot project in Melaka.

“The overall telecommunication industry remains competitive. At present, we view that the fixed broadband market is facing stiffer competition subsequent to the implementation of MSAP.

“This has negative repercussion on fixed broadband operators, especially TM which predominantly has been garnering the majority of the fixed broadband market share.

“Meanwhile, revenue of mobile operators has also been under pressure due to the change in revenue mix from voice to internet as well as change in the subscriber base. Thus, the partly allay the concern on earnings, cost management has been one of the key focus,” MIDF Research opined.

With that, BizHive Weekly takes a look at some of the major changes happening and are expected to happen in Malaysia’s telco market.

 

TM: En route to recovery

Since May last year, Telekom Malaysia Bhd’s (TM) performance has been marred by many major incidences.

As a government-linked company (GLC), TM felt the direct impact of changes in Malaysia’s federal government, which subsequently saw changes in its senior management team, as well as its operations.

Mid-last year, the Malaysian Communications and Multimedia Commission (MCMC) had enforced the Mandatory Standard on Access Pricing for broadband prices (MSAP) which required telcos to review their fixed broadband prices. TM had heeded this call by lowering its fixed broadband and mobile packages by approximately 25 per cent. Analysts have generally viewed that the reduction could significantly impact TM’s performance in the subsequent quarters.

“With the review of the broadband wholesale access pricing coupled with the retail broadband packages, the group’s data (which include the domestic leased bandwidth and other data services) and internet (which comprise of Unifi and Unifi mobile) segments are set to be checked. Note that, the Data/Internet segments contributed 22 and 36 per cent (FY17: 22 and 33 per cent) to the group’s total turnover of RM2.48 billion in the first quarter of 2018 (1Q18).

“For illustration purpose, should the wholesale access pricing and the broadband retail price are cut by 25 per cent, TM’s turnover is expected to be reduced by 3.5 to 13.7 per cent in FY18 to FY19E.

“Assuming a similar net profit margin of 5.7 to 6.3 per cent, its FY18 to FY19E net profit will be lowered to RM645 million to RM655 million (or down four to 13.4 per cent), respectively,” Kenanga Investment Bank Bhd’s research team (Kenanga Research) had noted.

For the financial year 2018 (FY18), TM reported that it was impacted by headwinds in the industry and operating landscape in 2018, with a revenue of RM11.82 billion, 2.2 per cent lower than RM12.09 billion reported in 2017.

Following the announcement of its lower FY18 results, TM had introduced its new strategy; the Performance Improvement Programme for 2019 to 2021 (PIP2019-2021), aimed at improving its services and cost management.

Settling on a new normal

Nevertheless, TM is growing out of the initial teething process of its price reductions and leadership transitions as the company has reported positive growth for 1Q19, surprising most analysts.

The group’s reported profit after tax and non-controlling interests (PATAMI) surged 96.2 per cent year-on-year (y-o-y) from RM157.1 million in 1Q18 to RM308.3 million in 1Q19 while its normalised PATAMI doubled to RM296.4 million.

Its 1Q19 earnings before interest and tax (EBIT) also doubled to RM504.8 million y-o-y compared with RM195.6 million in 1Q18. TM said, this was mainly due to the reduction in operating costs which saw the stripping off of some non-operational items such as unrealised foreign exchange loss on international trade settlement.

“TM’s 1Q19 core net profit of RM296 million (up 181 per cent y-o-y, up 183 per cent q-o-q) represents 45 per cent/49 per cent of our/consensus full-year forecasts respectively, a significant beat.

“This was mainly cost-driven, with the group’s cost optimisation efforts bearing fruit (the impact appears to be particularly pronounced at the mobile arm). MFRS 16 raised 1Q19 EBITDA by RM97 million and net profit by RM24 million,” the research team at Maybank Investment Bank Bhd (Maybank IB Research) stated in a report.

“We believe the effects of the cost optimisation efforts should largely sustain,” it added.

“While the market is expected to remain competitive, the PIP2019-2021 yield improved profitability for the group in 1Q19. Moving forward, TM is set to continue accelerate Convergence and empower Digital in line with its transformation that reinforces Customer Centricity.

“Over the next 3 year, TM will continue to focus on three strategic pillars – converged services (solidifying convergence position and vertical focus to serve industries going digital), simplification and digitalisation (product rationalisation as well as simplify process and digitalisation), and lean and lower cost (focus on core business and cost optimisation), with its integrated network infrastructure to bring a convergence digital lifestyle to all Malaysians,” Kenanga Research noted.

Despite recorded a sturdy performance in 1Q19, it pointed out that TM is keeping its FY19 KPIs unchanged for now, where the group is aiming to achieve a low to mid-single digit reven e decline (due to softer voice, data and managed services) with normalised EBIT target similar to FY18 level (at circa RM1 billion).

“We, however, believe the KPI targets are too conservative in view of the sustainable cost reduction arise from the PIP. Having said that, the degree of the cost saving moving forward may not be extensive as 1Q19 given a typical higher cost reduction tend to be recorded during the initial stage of each cost rationalisation programme,” it opined.

TM’s fundamentals normalising as clarity emerges on management roles

On key roles in its management, TM had recently cleared the air on the uncertainties surrounding employees holding key roles in the company.

Since November 2018, TM has been headed by acting group chief executive officer (AGCEO) Imri Mokhtar who was the group’s chief operating officer (COO). However, recently, TM announced the appointment of Datuk Noor Kamarul Anuar Nuruddin as its new managing director, group CEO and executive director, with Imri resuming his role as COO. The research team at AmInvestment Bank Bhd (AmInvestment) noted that the news provides some reassurance to the policy continuity as Imri resumed his previous role as COO.

“However, we are cautious on the new strategic direction which Kamarul could be embarking on following TM’s impressive cost cutting performance in 1QFY19 albeit briefly under Imri’s management.

“Kamarul was formerly Celcom’s chief technology officer responsible for its network strategic plan, later chief information technology and transformation officer, and then chief carrier collaboration officer managing collaborations with domestic network facilities providers, telcos and celcos, foreign cellular operators, as well as international carriers for roaming and traffic services,” it warned.

 

Axiata and Telenor – A potential regional giant

Earlier in May, the telco industry was shaken by news on the possibility of Telenor Group (Telenor) and Axiata Group Bhd (Axiata) merging its Asian operations.

In a press statement, Telenor noted that both companies are in discussions regarding a potential non-cash combination of their telecom infrastructure assets in Asia (MergeCo), in which Telenor would take a majority stake in MergeCo.

It said, both parties aim to create a Pan-Asian telco, with operations across nine countries and with access to approximately 300 million customers. The agreements in relation to the proposed merger is expected to be finalised within 3Q19.

According to Axiata, MergeCo is expected to be headquartered in Malaysia. It also noted that the proposal is expected to see the merging of Celcom Axiata Bhd (Celcom) and Digi.Com Bhd (Digi) which will in turn become the largest mobile operator in Malaysia.

Axiata also explained that the proposed merge could see the merging of edotco Group Sdn Bhd (edotco), the existing Axiata TowerCo, and Telenor’s Asian tower assets. However, it pointed out that Robi Axiata Ltd, a subsidiary of Axiata operating in Bangladesh, is expected to continue to be managed independently by Axiata, post completion of the proposed merger.

Analysts are generally positive about the possibility of a mega merger between two of the largest telco companies in Malaysia as it brings catalyst to the industry that’s plagued with an ongoing push-and-pull price war.

“We are positive on the above initiatives, although the preliminary discussion has no certainty that it will result in any transactional agreements between both parties,” Kenanga Research commented on the merger.

“Our preliminary assessment is that the merger would be positive for Digi as it would become the largest mobile operator in Malaysia and could potentially improve margins due to cost savings from sharing of resources, network optimisation and capex avoidance,” Public Investment Bank Bhd’s research team (PublicInvest Research) said.

While the potential operational synergies between the two major telcos are viewed as positive for the industry in Malaysia, there are several hurdles/challenges that need to be addressed.

The question on regulatory

Topping the list of hurdles and challenges MergeCo has to go through are the regulatory approvals given that MergeCo is involved in the nine different countries, and thus, subject to different policies and guidelines.

“Besides, spectrums would be another major concern, especially in Malaysia, as the local authority may be reluctant to award similar spectrums to the same entity,” Kenanga Research said.

It added that organisational and culture changes could be another challenge in view of both entities having different cultures, which may lead to culture clash.

There is also the concern on the fates of employees from both companies.

Nevertheless, Communications and Multimedia Minister Gobind Singh Deo had assured that the merger between Axiata and Telenor could be positive as it involves a Malaysian company.

“With this magnitude, this is something that the whole world is looking at, and this gives Malaysia an opportunity to demonstrate that we have laws that adequately deal with mergers of this nature,” he was quoted as saying by Bernama after the launching of Dell Digital Lab recently.

“As far as we are concerned, we look at the proposal positively and we are concerned whether or not the initiative or merger will result in the loss of jobs. But I have had a meeting with those concerned, and they have shown me that in fact this merger exercise will create new jobs,” he added.

However, he also pointed out that the merger is still at the proposal stage and as such, he noted that when the proposal is finalised, the government will make appropriate actions based on the proposal.

Taking a larger bite of the market

With MergeCo, there is also the question on fair competition as both Axiata and Digi hold a large share of the telco market in Malaysia.

AmInvestment said: “In Malaysia, the merged revenue of RM14 million will mean the largest telecommunication market share (including TM and Time dotCom) of 35 per cent and a dominant mobile share (including U Mobile) of 53 per
cent.

“Its combined subscriber base of 20.7 million translates to a commanding market share of 55 per cent.”

It further warned: “Together with the possibility that the merged entity may have to surrender parts of the spectrum which had been awarded to Celcom and Digi, we caution that the merged entity may not be able to fully capture the synergies, which management indicated could reach RM15 billion to RM20 billion over five years in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale.”

Kenanga Research also pointed out that shareholders’ approvals, meanwhile, might be another hurdle, especially when the valuation is not appealing enough but still requires consents from the shareholders.

Maxis: Focusing on enhancing Malaysia’s digital lifestyle

Maxis Bhd (Maxis) continues to focus on enhancing Malaysians digital lifestyle by offering more packages that suits different income groups and business types in Malaysia.

Last year, Maxis announced that it made a significant change to its long term strategy, setting the foundation to be a strong converged solutions player in Malaysia and a development path over the next five years to help achieve its ambitions.

In a statement, it said, there are three focus areas in this strategy.

With its capabilities in fixed and superior mobile connectivity, Maxis aims to cater to the evolving digital lifestyles of everyone – reaching even more individuals, homes and businesses through its converged propositions that will offer more services and solutions. During the first quarter of this year (1Q19), it prepared for the first NB-IoT services, new fibre broadband speeds and achieving strong results for its existing converged solution, MaxisONE Prime.

Maxis also aims to leverage its technology and network leadership, as well as capabilities in big data and analytics to deliver personalised experiences for its customers.

The company is also focusing on improving and evolving its organisational culture and one of the key initiatives carried out during the quarter was a reorganisation of its people, processes and structure to align with its strategy. To operationally implement this strategy, Maxis is moving its people into different customer centric focus areas, and developed a new organisational structure to build both capacity and capability.

Maxis’ strategy is bearing fruit as AmInvestment noted that in 1Q19, Maxis remains revenue leader despite Digi’s larger subscriber base.

“Digi continued to command the largest subscriber market share at 36 per cent compared with Maxis’ 35 per cent while Celcom remained a distant third at 29 per cent.

“Digi’s pole position since 1Q2016 stemmed largely from its strength in the prepaid segment, underpinned by the migrant population. However, Maxis is strongest in the postpaid segment with an ARPU and subscriber base which are 31 and 16 per cent respectively higher than Digi’s.

“This places Maxis in the leading position with a 1Q19 revenue market share of 41 per cent compared with 31 per cent for Celcom and 28 per cent for Digi,” it explained.

It further noted that the consolidation between the operations of Celcom and Digi will reduce the number of cellular competitors to four from five as the now dominant merged entity will be unlikely to initiate further price cuts that will only erode its bottom line.

“As merger synergies could take at least two years to materialise, Maxis will be free to pursue its converged fiberised solutions for its consumer, enterprise and business segments,” it highlighted.

Meanwhile, in a separate note, AmInvestment said, Maxis could be affected by the cessation of U Mobile’s leasing arrangement with Maxis’ 3G radio access network (RAN) on December 27, 2018. According to U Mobile, U Mobile has extension of its 3G RAN share agreement with Maxis will only be to limited areas. The term of the agreement is until end June 2019.

Nevertheless, AmInvestment pointed out that amid moderating mobile competition, the group’s bread-and-butter cellular earnings are expected to continue being resilient with Maxis’s postpaid share of service revenue gradually rising to 55 per cent in 4QFY18 from 52 per cent in 1QFY17. Maxis’ 4QFY18 service revenue rose one per cent as the decline in prepaid was more than offset by the postpaid segment.

“With a flattish base capex of RM1 billion annually, Maxis’ plan to invest an additional RM1 billion over three years in fiberised solutions, digitalisation and productivity capabilities could be back-loaded towards the later years.

“These capex programmes exclude increased spending for the 700MHz spectrum, which could cost up to RM431mil for two blocks of 2 x 5MHz bands. However, management is confident of securing external financing even with FY19F net debt/EBITDA reaching 2.1-folds.

“Maxis is moving from a consumer/mobile-centric telco to a converged communications & digital solutions provider, similar to TM’s quadplay agenda over the past five years.

“As the telco that has been offering mobile and fibre connectivity over the past years, Maxis hopes to penetrate the enterprise business segment with an eye on managed/cloud services and IoT solutions,” it added.

The research team at TA Securities Holdings Bhd (TA Securities) also noted that via the five-year strategy, the group aims to transform from a ‘consumer and mobile-centric telco’ to ‘Malaysia’s leading converged communications and digital services company’.

“Convergence will be a differentiation factor to support customer retention and future growth. Internal targets are for service revenue to exceed RM10 billion (FY18: RM8.1 billion) by 2023.

“While we are positive on management’s efforts, we estimate low-single digit service revenue growth of 0.9 to one per cent in FY20 to FY21 until meaningful traction is observed.

“Furthermore, while Maxis’ leadership in mobile connectivity would support its ambitions, we note that the group could face competition from peers like Celcom and Digi as they are on a similar bandwagon to capture growth from the enterprise segment,” it added.