THERE will come a time when the market is so saturated with a type of service or product that the provider industry will have to, inevitably, slow down, like a giant impeded by its own inertia.
The telecoms industry in Malaysia is currently that giant, its gazelle pace from a few years back moderating into a steady march.
With maturity as the backdrop, analysts are now mostly “neutral” on the sector which is trading at a rich premium compared with the regional peers and has no immediate re-rating catalysts in sight.
One analyst described the telecoms market in Malaysia as “crowded”, having achieved a 140% penetration rate with 38 million mobile phone users, shared out by eight players.
A Hong Leong Investment Bank analyst says the telecoms market, which has been slowing down in the past two years and moving towards data service, is slated for consolidation.
While data usage has doubled, its pricing has fallen, neutralising the sector’s growth potential, he says.
“In light of this, we expect the telcos to consolidate going forward,” he says, adding that they should be exploring collaborations and sharing infrastructure and spectrum, as well as focus on the sale and marketing of their products.
“Telcos need to move towards outsourcing parts of their operation. India and Indonesia players are already doing that,” he points out. Local telcos, with Huawei Technologies Co Ltd as a supplier or partner, for example, was one step towards this.
He also believes local telcos need to change their capital expenditure (capex)-heavy business model to a operating expenditure (opex)-focused one.
“With a capex model, regardless if you have business or not, the cost is there but with an opex model, the cost becomes variable – if business is good, the cost is higher and vice versa,” he says.
Also, he thinks that it would not be a bad idea for telcos to consider listing their assets, mainly the telecom towers. Companies that provide infrastructure solutions for cellular operators include Instacom Group Bhd and OCK Group Bhd, the latter also provides network services.
“Take for example KPJ Healthcare selling their asset to another company to manage, much like entrusting it to a real estate investment trust,” he says, “That sale would provide the money to expand, or they could squeeze more dividend from the cashflow.”
Another analyst covering the sector attests to the difficulty in getting attractive margins from data services. He reveals telcos are expecting about 5% revenue growth rate this year.
“Malaysian telcos are looking at how to increase data growth but the margins for data service is not that high (compared with the traditional voice and message services),” he says, adding that players are selling bundle packages now to protect their revenue. Handset sales have been the notable driver of revenue growth of late.
Although the ballooning pool of smart phone users suggests that data is the way forward, he believes “wherever the telcos are not doing as well in, they should continue to improve to gain market share”.
He believes telcos are “mostly rather rational” and would not wage price wars.
While major cellular operators Maxis and DiGi have sizeable local businesses, Axiata has leverage in the regional arena. In stark contrast, TM’s core business is in the fixed line and fibre broadband segments.
That said, the sector remains attractive as a dividend play and if there is any downside to the stocks, it would be limited.
Maybank Investment Bank Research says in a note this week that although valuations of wireless operators are at a premium to regional peers, “we do not expect substantial downside to telecom stocks due to the trapped domestic liquidity within the local equities market and attractive dividend support of between 4% and 6% net yield the stocks provide”.
Maybank analyst Tan Chi Wei adds that bond yields across the region have climbed and telecom stocks, often perceived to be yield plays, have corrected.
“Concerns over the premature ending of the US quantitative easing programme have re-emerged and further yield compression thus appears unlikely in the near term,” he says. Comparing apple to apple within the region, Malaysian telecom stocks have fallen less than regional peers which Tan believes is consequent of the trapped domestic liquidity.
Another analyst from a foreign-based brokerage however believes there could be a re-rating of the industry that has been trading on the high side.
“There is a risk from the equity market perspective as the companies are trading at more than 20 times price-to-earnings ratio which is very high already,” he says. He opines that investors who need not be invested in telcos will find better alternatives.
“Typically, people pay more for a company with good growth. But if growth is slowing, they may want to invest elsewhere because while the telecoms industry will sustain its growth, it will not be growing fast,” he says, noting that Malaysian investors are also more confident now that the election overhang has dissipated and economic growth is decent.
“They may want to look at more cyclical stocks.”
He notes that a growth slowdown in a matured industry is very difficult to overcome. Instead of spending unnecessarily for expansion, telcos should protect their business stability because any minute loss or gain in market share will be magnified and starkly reflected in their earnings.
On the other hand, an analyst with local bank-backed brokerage thinks that telecoms counters will not suffer as big funds like the Employees Provident Fund and Permodalan Nasional Bhd would support the share prices.
“The share prices could fall a little but I don’t see the big funds selling down as telcos are good dividend stocks,” he says, adding that the stocks will continue to outperform their regional peers.