Some pressure expected on earnings growth


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PETALING JAYA: Despite a decent performance in the first half of this year, the telecommunications industry could see some pressure on earnings in the remaining six months of the year amid cautious consumer sentiment and intense industry competition.

In general, the financial results of most telecommunications companies (telcos) for the second quarter of June 31, 2021, came largely in line with analysts’ expectations.

RHB Research Institute, which maintained its “neutral” stance on the telcos, noted while core mobile earnings of the telcos – namely Maxis Bhd, Celcom Axiata Bhd and Digi.com Bhd – grew sequentially, they were offset by weaker fixed line earnings, with overall core sector earnings up 6% for the first half of 2021 (H1’21).

Maxis officeMaxis office

“We see some pressure in H2’21 core earnings from continued cautious consumer sentiment, buffered by cost discipline and enterprise spending,” the bank-banked research house said.

Its “neutral” stance is premised on the still-tight industry competition, which could pressure margins.

“We prefer fixed line and infrastructure-typed plays,” RHB Research said, pointing to Telekom Malaysia Bhd (TM), (pic below) Axiata Group Bhd and OCK Group Bhd as its choice picks.

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After posting 37.4% quarter-on-quarter (q-o-q) core earnings growth in Q1’21, aggregate fixed line core earnings contracted 17% q-o-q from the normalisation of TM’s operating expenditure and a RM80mil voluntary separationscheme (VSS) cost booked in Q2’21.

This led to its 23% q-o-q decline in TM’s sequential core earnings, RHB Research noted.

However, aggregate fixed line earnings growth was still up a commendable 15.7% year-on-year (y-o-y), thanks to superior topline growth of 9%, with continuing strong demand for fibre broadband (FBB) services from work/school from-home demands, it said.

“We expect the strong earnings momentum to continue in H2’21 and into 2022 on the back of the Jendela programme, which is targeting an additional 2.5 million fibre premises passed by end-2022,” RHB Research explained.

In the mobile segment, the research house said, revenue growth would be supported by the ongoing B40 campaign (Jaringan Prihatin).

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“We continue to see flat to low single-digit growth in mobile service revenue (MSR) for 2021, aided by the progressive recovery in economic activities and extension of the B40 campaign with telcos,” RHB Research said.

In Q2’21, the telcos MSR grew 1.5% q-o-q, supported by the B40 acquisition campaigns (Jaringan Prihatin), relatively steady average revenue per user and seasonality. It grew 3.8% y-o-y, off the low base of MCO 1.0, which clobbered the prepaid segment.

For the quarter in review, Maxis and Celcom saw earnings market share (EMS) gains at the expense of Digi, whose EMS narrowed 0.8% q-o-q to 30.6%. Celcom’s EMS improved 0.1% q-o-q to 27.9%, while Maxis’ EMS gained 0.7% q-o-q to 41.5%.

Meanwhile, AmInvestment Bank Research maintained “overweight” on the sector. It had a “buy” call for TM, citing significant cost improvements and brighter prospects under the government’s MyDigital initiatives.

The brokerage downgraded Maxis to “hold” from “buy” previously, given its recent share price recovery.

Under the MyDigital initiative, licensed telcos would be given equal access to the government’ fifth-generation (5G) spectrum and infrastructure to roll out 5G services nationwide, expected to begin in stages by the end of this year.

Celcom logoCelcom logo

“We view this as being neutral to cellular operators who will not be burdened by the 5G capex,” AmInvestment Bank Research said. “However, being the owner of the nationwide high-speed broadband fiberised network, we believe that this is positive for TM and to a lesser extent, TIME Dotcom Bhd, in providing the critical backhaul backbone system for 5G networks,” it added.

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