Telco sector neutral, TM and Axiata merger still likely

PETALING JAYA: The telecommunication sector which is expected to stay “neutral”amid expectations of intensifying competition and mounting price pressure, has left AmInvestment Research still banking on the Axiata Group Bhd and Telekom Malaysia Bhd (TM) merger to set the tone for an industry consolidation which the research house deems as the logical route forward.

News of a possible merger between the two emerged some nine months ago, however both companies denied news of a reunion after a de-merger in 2008.

The merger of Axiata-TM is seen as complementary with Axiata’s mobile services integrating with TM’s fixed-line operations, enabling it to draw in share from players such as Maxis Bhd, Bhd and U Mobile, on top of recognising earning gains due to cost effectiveness.

“Assuming a 10% cost reduction would mean substantial annual savings of RM2.1 billion, or 3% of the combined group’s market capitalisation,” Aminvestment said.

On another note, risks from new spectrum offering is tapering off with extensions to spectrum assignments by the Malaysian Communications and Multimedia Commission (MCMC).

“The huge capital expenditure speculated earlier on spectrum costs appear to be declining as the 2600MHz spectrum, used for 4G connectivity, which expired on December 2017 has been extended to December 2019. Also, we understand that MCMC may be extending the 2100MHz band, used for 3G deployment under the spectrum assignment structure, from March 2018 until 2034,” the report read.

On the broadband front, competition is expected to grow with the entrance of Broadnet Network, a second fixed broadband network player.

Pressure is expected to set in on price and speed with Broadnet hitching on Tenaga Nasional Bhd’s electricity transmission lines to drive the Nationwide Fiberisation Plan.

Also with the government having previously announced its intention to double fixed broadband speed and halve prices within two years, further pricing revision is expected this year.

Meanwhile, price wars between cellular service providers are expected to go on with no end in sight, as Bhd and Celcom Axiata Bhd expected to up the ante against U Mobile Sdn Bhd and TM’s Webe affordable plans – giving out a weak revenue growth outlook in the near to medium term.

However, any significant organic revenue or margin growth improvement is seen as being unlikely over the next one year, with the global landscape for rapid data trajectory being driven by lower price plans and increasingly expensive capital expenditure (capex) rollouts to provide 4G capabilities, coverage and service quality.

Meanwhile, continuous revenue decline on the back of tight competition amid a decreasing subscriber base could warrant a de-rating.

As at the third quarter of 2017, total subscribers fell by 3.5 million or 12% since the first quarter of 2015, which came almost entirely from the prepaid segment.

About 73% of the loss came from Celcom and the balance from Maxis while Digi managed to recover some lost ground. Nevertheless, ARPU was relatively resilient since the first quarter of 2016 although upside growth was restricted by the price-sensitive market.

Axiata and TM are the top stock picks, given its game-changing merger prospects.

Meanwhile, Maxis and Digi earned “hold” calls due to lack of traction in revenue growth amid potential loss in competitive advantage under a re-energised Axiata-TM brand.