RAM Ratings, in a commentary on the sector, however, said profitability and margins were anticipated to remain flattish among players. It also said data consumption would continue to register strong growth.
KUALA LUMPUR: Affin Hwang Capital Research has upgraded the telecommunications sector to Neutral as it expects earnings to rebound by a sharp 12% in 2017 after the 24% decline in 2016.
The research house said that excluding Axiata, sector earnings are projected to grow at a more realistic 1%, consistent with the guidance by celcos of flattish revenue and EBITDA levels for 2017E.
“However, , we do not foresee sector earnings returning to the RM7bn range (2013-2015 levels) over the near term dragged by enhanced competition within the celco space and operational losses at Webe for Telekom Malaysia,” it said.
Affin Hwang Research said although 4Q16 results were broadly within expectations, sector earnings declined 24% in 2016 amidst weaker revenue and higher costs.
The 58% collapse in Axiata’s earnings was a major disappointment. Meanwhile, Maxis held up pretty well, operationally, amidst shrinking sector revenue.
Competition has, however, abated over the past two quarters and been reflected in improved operational performance. Competition, nevertheless, remains a near term key risk.
“We raise our Sector rating to Neutral (from Underweight) after our recent upgrade on Axiata. We still like Digi for sector exposure, but Maxis’ resilience is also a compelling reason to own the stock,” it said.
Affin Hwang Research said to sum it up, Malaysian telcos reported a mixed bag of earnings for 4Q16 but broadly in line with expectations despite the 24% contraction in earnings.
Sequentially, earnings contracted 13% due to massive accelerated depreciation charges at Axiata. At the headline net profit level, Axiata recorded a quarterly net loss hit by forex losses on its US$ loans.
“Operationally, the celcos reported its third consecutive year of decline in revenue and EBITDA. This has been due to competition from unlisted player U mobile.
“Maxis has nevertheless managed to gain revenue share over the past 2 years. Its new management team (new CEO from late 2013), revamped product/pricing strategy and premium network has started to bear fruit.
“Surprisingly, despite the competition and the stronger US$, sector margins have held up impressively well on cost efficiency and possibly more efficient use of its data network.
“We recently upgraded Axiata to HOLD (from Sell) during the reporting season and with this, push the sector back to a Neutral from Underweight.
“Sector however lacks any re-rating catalyst while valuations are demanding vis-à-vis historical average especially amidst increased competition.
“ Likewise, we think that dividend yield plays are unlikely to outperform in a rising yield environment. Moreover sector yields at 3% are not too compelling. For sector exposure, our preferred picks are Digi and Maxis,” it said.
