The changing fortunes of telcos


Ebitda margin erosion seen on 5G wholesale cost

PETALING JAYA: Tan Sri Mokhzani Mahathir will be taking over as chairman of Maxis Bhd next month at a time when the mobile industry is facing one of its toughest battles in history.

The fortunes of these mobile companies are expected to change and their once lofty ebitda (earnings before interest, tax, depreciation and amortisation) margins are expected to be thinner as the years go by.

No doubt his position is that of a non-executive chairman but he has been with Maxis for over a decade.

Mokhzani MahathirMokhzani Mahathir

Add that to his business acumen and experience, these will surely count as the celco strides ahead.

Still, will Maxis and its peers, Celcom Axiata Bhd and Digi.com Bhd, be able to remain aggressive in providing services to consumers and retain their earnings as they will have to brace to a new way of doing things by relying solely on a single shared 5G infrastructure to be built by the government as opposed to having their own networks?

Only time will tell and Maybank IB Research in a recent note said that the revenue opportunity from 5G to telcos remains rather subjective for now.

With little clarity on the whole 5G issue and with telcos being absolved from 5G capital expenditure (capex), its simulation indicates that the corresponding 5G wholesale cost is potentially significant at up to 11% of mobile telco’s pre-5G revenue.

Telcos would have to manage this through revenue uplift or cost optimisation, it said.

“Assuming 5G wholesale costs are recognised entirely as telcos’ operational expenditure (opex) on the profit and loss, telcos would need to grow revenue by a similar 4%-11% from 2020 to preserve ebitda margins, ” it added.

This could be challenging for the Big 3 telcos (Celcom, Digi and Maxis) since their revenues have been declining the past seven years.

By 2025, it estimates that 5G wholesale costs would account for about 6%-11% of Celcom’s and Digi’s pre-5G revenue, and about 4%-8% of Maxis.

These wholesale arrangements would either depress ebitda margins or inflate balance sheets, depending on whether the new accounting standard MFRS16 is applicable, it added.

The Ebitda margins that telcos have enjoyed ranged from 35% to over 45% for years.

The research house added that instead of just focusing on the potential ebitda margin erosion, it could also contrast these opex-to-sales figures to telcos’ capex intensity, which it expects to trend at 13%-16% in 2021 among the Big 3 telcos.

The three will also have to phase out 3G by year-end. That points to a likelihood of accelerated depreciation of 3G equipment this year.

Maybank added that the 5G deployment should boost demand for passive infrastructure, with Telekom Malaysia Bhd (TM) a notable beneficiary.

To stay ahead in the fibre infrastructure game, the Big 3 also recently teamed up to jointly develop and share fibre infrastructure, thereby potentially bypassing TM’s high-speed broadband and sub-urban broadband networks to reach out to consumers. Fibre infrastructure will remain vogue for years to come.

Maybank Research continues to have a “neutral’’ call on the sector while AmInvestment Research has an “overweight’’ call.

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