Consolidation theme

In the fibre broadband market, TM’s unifi has been aggressively competing for market share with recent promotions while Celcom and Digi have begun to target selective market segments in the Klang Valley for their fibre-to-home offerings.

PETALING JAYA: The telecommunications sector could see more consolidation moving forward as players strive to reduce costs amid declining yields and growing pressure to invest in new spectrum.

In a research note, AmInvestment Bank said the consolidation theme remained in play as the reimposition of the movement control order (MCO) is expected to have an impact on various business sectors.

The research house highlighted that declining data yields, new 5G spectrum fees and capital expenditure pressures are likely to drive players to seek consolidation to cut costs, secure economies of scale and reduce rivalry.

“While the Malaysian Communications and Multimedia Commission has shown a preference for maintaining competitive pressures to provide reduced broadband prices for consumers, we view that the industry’s stagnant revenue trajectory will eventually drive the sector towards more merger and acquisition activities, which was viewed as inevitable during Axiata Group Bhd’s analyst briefing last month, ” it said.

AmInvestment said the MCO 2.0 could have a partly mitigated impact on cellular operators (celcos), which experienced lower prepaid subscriber acquisitions with the temporary closure of physical outlets and suspension of postpaid accounts for non-payment back in March-April last year.

This partly contributed to celcos’ revenue contracting quarter-on-quarter (q-o-q) by 8.7% in Q2,2020 before recovering 6% in Q3 with the relaxation of movement restrictions.

“From our channel checks, operators remain cautious on further stresses on small-medium businesses amid declining overall disposable income from the lockdowns and slower economic activities.

“However, celcos are more prepared this round and also hopeful for a partly mitigated impact from subscriber renewals and subscriptions as the previous lockdown had encouraged more consumers to embrace digital platforms and online payment channels.

“Additionally, the MCO 2.0 is less onerous given the imposition on fewer states versus the first lockdown while the free 1GB data offer for productivity and education has been extended indefinitely since last month.

This is unlikely to significantly increase operators’ cost structure while driving higher work-from-home data usage, ” it said.

The larger concern for operators, really, is the unrelenting competition in mobile and fixed line business, it added.

Currently, U Mobile offers the most competitive plan, which offers unlimited data and 6GB hotspot with speed cap of 6Mbps, while Digi’s current entry-level plans for prepaid and postpaid packages are gaining traction even with limited data quotas.

In the fibre broadband market, TM’s unifi has been aggressively competing for market share with recent promotions while Celcom and Digi have begun to target selective market segments in the Klang Valley for their fibre-to-home offerings.

AmInvestment also noted that cellular net subscribers decreased by 188,000 to 30.2 million in Q3,2020 after registering a surprisingly strong 121,000 q-o-q increase in Q2,2020.

Pointedly, Maxis registered an unexpected 618,000 reduction in subscribers versus a net gain of 373,000 for Celcom and 57,000 for Digi.

“The main drag stemmed from a reduction of 277,000 prepaid users to 20.2 million, wholly attributable to Maxis’ 683,000 drop with the removal of revenue-generating subscribers beyond 30 days, SIM consolidation and intense competition.

“This was the only prepaid decline amongst cellular operators as Celcom managed to register a 339,000 increase with the launch of unlimited data packages while Digi rose by 67,000, ” it said.

Nonetheless, celcos’ core net profit recovered in Q3,2020 with an increase of 20% q-o-q to RM925mil after contracting by 11% due to the impact of the first MCO which affected service revenue, subscribers and average revenue per user.

Celcos’ Q3,2020 service revenues rose 6% q-o-q to RM5.4bil, which drove EBITDA by 8% q-o-oq and EBITDA margin up by two percentage points (ppt) to 16.2%.

In Q3,2020, AmInvestment said that Maxis’ overall subscriber market share of 37% retained its lead over Digi’s 35% while Celcom remained third at 28%.

However, Digi has now retaken its pole position in the prepaid segment with the highest market share of 38% from Maxis, which has fallen to 35% following its sharp Q3,2020 reduction.

Nevertheless, Maxis’ postpaid subscriber focus and convergence strategy with its fibre broadband services remains formidable as compared to Digi and Celcom.

AmInvestment maintained its “overweight” rating on the telecommunications sector with “buy” calls for Telekom Malaysia Bhd, which has shown significant cost improvements together with more compelling dividend yields while Axiata offers bargain EV/EBITDA valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies.

These valuations are even more compelling given their three to four star rating for environmental, social, and governance compliance.

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