PETALING JAYA: The telecoms sector is expected to face increasing margin pressure for the rest of the year as competition continues to intensify.
In light of this, CGSCIMB Research is maintaining a “neutral” outlook on the sector.
“We foresee a 3.7% decline in industry mobile service revenue in 2019 for the big three players (Maxis, DiGi and Celcom), with market competition expected to stay tight, Maxis hit by revenue loss from the termination of the network sharing deal with U Mobile and Celcom impacted by lower wholesale revenue from TM.
“Meanwhile, we believe TM’s fixed line broadband business is likely to face continued average revenue per user (arpu) pressure due to more competition in the long run.”
The research house said the telecoms sector trades at a 10% premium over the Asean telecoms average of 17.2 times, with an inferior three-year earnings before interest, taxes, depreciation, and amortisation compounded annual growth rate of 1.7%.
“Dividend yields of 3.5% to 3.7% in 2019 to 2020 are decent. Downside risks to our sector call are spectrum auctions for 700MHz and 2600MHz, with higher-than-expected final prices and more intense competition.
“An upside risk is value creation from mergers and acquisitions, such as the materialisation of the potential Axiata-Telenor merger.”
Affin Hwang Capital expected the telco market to remain challenging in the second half of 2019, mirroring that of the first quarter.
“Against an uninspiring revenue outlook, stock-picking is key. We like TM for its strong earnings recovery, driven by sustained cost optimisation and an undemanding valuation of 14-times 2020 price-to-earnings ratio.
“Elsewhere, we are positive on the possible merger between Axiata and Telenor Asia.”
Separately, CGSCIMB said the mobile industry’s first quarter 2019 revenue eased year-on-year.
“Mobile industry service revenue declined 3.6% year-on-year in the first quarter of 2019. Excluding the wholesale revenue impact at Maxis and Celcom, it would have fallen 1.5% year-on-year.
“This was mainly driven by a 33% cut in the regulated mobile interconnection rates (effective January 2019) and would have been largely stable year-on-year otherwise.”
The research house added that the structural decline in prepaid revenue continued this quarter, down 6.5% quarter-on-quarter.
“The big three’s prepaid subscriptions continued to fall, by a steeper 704,000 to 21.8 million owing to persistent pre-to-postpaid migration and industry-wide SIM card consolidation.
“Meanwhile, postpaid revenue eased 2.7% quarter-on-quarter on weaker seasonality. The big three’s postpaid subscription grew a modest 1.8% quarter-on-quarter to 9.3 million, while arpu dipped 3.6% quarter-on-quarter.”
CGSCIMB said the prepaid market stayed active during the March to May period, largely driven by mobile virtual network operators and smaller operators.