Telco sector sets off on a quiet path

Analysts have welcomed the end to the price wars, but remain neutral on the sector


The price wars among cellular operators seem to have subsided, as these service providers resort to other measures to defend their income in an already saturated market, against thinning margins and little room for growth.

Analysts have welcomed the end to the war, but are neutral on the sector despite the return to stability for the voice and data service providers in the last few months.

Maxis Bhd and Celcom Axiata Bhd — two of the country’s Big Three players — posted stable and improved earnings for the second quarter ended June 30, 2017 (2Q17).

DiGi.Com Bhd, which has been the key player in the top-up segment, continued to be dragged by its prepaid segment.

The unlisted U Mobile Sdn Bhd, majority owned by tycoon Tan Sri Vincent Tan, has been going strong and eating into the cake of the other operators. The company has 5.6 million subscribers, of which 75% are prepaid users.

An industry analyst said the outlook on the sector for the second half of the year is expected to be quiet, as players continue to focus on improving their weaknesses.

“The competition among players is more stable, less people are coming up with price wars. The sector should be more or less stable for the rest of the year,” the expert told The Malaysian Reserve.

CIMB Investment Bank Bhd (CIMB Research) in a recent report said the mobile industry service revenue stabilised in 2Q17 with a 0.9% decline year-on-year (YoY) and a 0.2% drop quarter-on-quarter (QoQ).

Postpaid revenue grew 6.2% YoY and 1.3% QoQ, driven by migration from prepaid to postpaid, as well as the take-ups of more expensive plans.

Prepaid revenue, however, dropped 7.9% YoY and 2.3% QoQ, attributed to intense competition and industry-wide SIM card consolidation.

The research firm said for the June-August period this year, more efforts were focused on the prepaid segment for the three major telcos and other players.

But the service operators did not undercut on pricing for these new offerings, but instead targeted specific segments or were bent on upselling.

Most telcos have resorted to cheap entry phone package to entice customers, especially in the market when high cost of living and rising inflation are hitting the majority.

But telcos are also seeing the sudden departure of foreigners. The authorities have been trying to weed out illegals since last year. Most of these illegals used prepaid packages.

“The prepaid segment has been declining due to migrant worker issues, as seen in DiGi’s results, and also a shift in interest from prepaid to postpaid.

“With price reductions and higher data quota, it makes sense for users to switch to postpaid. Even so, the trend will continue but not in a big way. The Malaysian market is still a prepaid market,” the analyst said.

Different Fortunes

In terms of service revenue, Celcom outperformed its peers slightly with a 1.4% YoY increase (0.7% higher QoQ) for 2Q17, while Maxis’ fell 2.5% YoY (down 0.6% QoQ).

As for DiGi, its service revenue decelerated from 1Q17 to fall 1.3% QoQ in 2Q17 mainly due to a challenging prepaid segment.

CIMB Research said Celcom gained revenue market share (RMS) for the first time in 2Q17 since 2Q14, up 0.5% to 30.3%, which consolidated its second position.

Maxis’ RMS slid 0.2% QoQ to 40.2% in the quarter under review, while DiGi’s fell 0.3% QoQ to 29.5%, its fourth consecutive quarterly dip.

Celcom’s earnings before interest, tax, depreciation and amortisation (Ebitda) fell 1.9% YoY, with Ebitda margin higher 0.7% YoY at 38.9%.

For Maxis, its Ebitda jumped 9.3% YoY, while its margin rose 2.8% YoY to 50.8%.

DiGi’s Ebitda eased 2.5% YoY, though its margin climbed 1.8% YoY to 46.2% in 2Q17.

AllianceDBS Research Sdn Bhd upgraded Maxis to ‘Hold’ from ‘Fully Valued’ after the telco’s 2Q17 net profit rose 18% to RM574 million from a year earlier.

The RM1.6 billion raised from a private placement would likely resolve any funding issues for the upcoming spectrum allocation and saving investors from a potential trim in dividend.

It said Maxis has performed relatively well despite the challenging mobile market, while any irrational competition in the sector would hurt the telco’s growth.

JF Apex Securities Bhd maintained a ‘Hold’ call on DiGi as the company’s earnings declined 14.7% YoY to RM358.9 million in 2Q17, while revenue fell 6.2% YoY to RM1.55 billion following weakened prepaid revenue.

The research firm said DiGi’s prepaid revenue is expected to normalise moving forward as loss of revenue from legacy prepaid services moderates.

TA Securities Holdings Bhd issued a ‘Hold’ rating on Celcom’s parent Axiata Group Bhd, observing that despite Celcom’s improvement in service revenue, the company has much to do still in areas of network, sales and distribution, and digitisation efforts.

It noted subscriber growth for Celcom remains a problem, with net churns now lasting for seven quarters particularly in the prepaid segment, in line with industry performance.

The telco’s profit after tax rose 37.6% YoY to RM357.5 million in 2Q17 mainly from a one-off intergroup gain from disposal of an associate, while revenue slipped 3.5% YoY to RM1.62 billion.

The rest of the year will be tepid for telcos. They will continue to protect their turf, manage cost and rewrite the script in a country where registered cellular lines are more than the total population.