Premium segments and sector consolidation high on telcos’ agenda

For telcos in Malaysia, any rewards are short-lived

By NG MIN SHEN / Graphic By TMR

Price has always been the selling point for telecommunication operators (telcos).

In a saturated market with almost no space to outmanoeuvre your competitors, packaging and prices have been the quick remedy.

Telcos have been slashing prices, adding bandwidth and offering free calls all in one package.

Before users can digest an offer, another telco is also already sparring a more delightful offer.

It is entertaining.

But such wars have only resulted in users’ migration, jumping from one telco to another.

For operators, any rewards are short-lived.

Dwindling margins and higher capital expenditure (capex) are pressing telcos’ bottomline.

Last year, top telcos were more distant to such wars. Efforts were focused on customer retention and growth in the premium segment.

Retaining customers ensures sustainable income.

Economically, keeping the present customers is less costly than investment on attracting new ones.

With the ever-increasing demand for more and higher quality data, telcos are expected to remain glued to ways to keep their customers loyal — and the premium segment, in particular — with quality services.

That war is expected to wage behind the scenes, especially with rising demands for data.

“Telcos this year will largely focus on revenue growth via customer retention and enlarging their higher- paying customer segment,” said AmInvestment Bank Bhd senior VP of equity research Alex Goh.

He said Maxis Bhd is a brand that is able to retain customers due to their service quality and a generally better offering, although the packages are priced higher than its peers.

“For players like U Mobile Sdn Bhd that do not have comparable service quality and footprint, they will offer more attractive deals with unlimited data.

“Eventually, DiGi.Com Bhd and Celcom Axiata Bhd may have to look into these types of packages,” he said.

But in a country where there are more mobile subscriptions than the population, room for growth will be a battle.

Telcos are forecast to convert their prepaid customers to postpaid plans, as monthly postpaid revenue is almost triple that of monthly prepaid revenue.

Such higher revenue is needed for the telcos to deliver a strong result.

In a recent sector report, Goh said the near-to medium-term revenue outlook remains weak as DiGi and Celcom are expected to up the ante against U Mobile and webe digital Sdn Bhd — the digital services arm of Telekom Malaysia Bhd (TM) which is set to be rebranded as UniFi Mobile.

He said the global landscape showed a trajectory which is driven by lower price plans and increasingly expensive capex rollouts to provide faster coverage, subsequently meaning that “any significant organic revenue or margin growth improvement is unlikely over the next 12 months”.

Market analysts have not buried the idea of consolidation as the way forward to reset the sector’s dynamics, as smaller telcos struggle against the Big Brothers for subscribers.

“Note that in the fixed-line segment, there have been reports of the entry of Broadnet Networks Sdn Bhd, which would be a contender for TM. As a fixed-line player, Broadnet would also have the ability to offer mobile services,” Goh said.

In his report, Goh said sector consolidation would likely be led by a remerger between Axiata Group Bhd and TM, which would allow Axiata to integrate its mobile services into TM’s fixed-line operations to garner more mobile market share from other players.

Both Axiata and TM were listed as top picks for the sector, while ‘Hold’ calls were placed on Maxis and DiGi due to resistance in gaining traction in revenue growth, should the Axiata- TM merger take place.

On the potential listing of U Mobile as a sizeable disruption in the sector, an industry analyst said the country’s fourth-largest mobile operator does not appear to be on track for an initial public offering (IPO).

“U Mobile’s IPO has been talked about for several years already, but they are not profitable yet in terms of their bottomline — which makes them an unattractive pitch to investment banks.

“It’s hard to garner support in an oversaturated market like Malaysia which has a population of some 30 million people, yet there are over 40 million SIM card users in the country,” the analyst said.

The telco sector has received ‘Neutral’ calls from AmInvestment and Maybank Investment Bank Bhd (Maybank IB), with the latter in a recent report stating its expectations for mobile revenue from the “Big 3” — Maxis, Axiata and DiGi — to revert back to a slight growth in 2018 after four consecutive years of decline.

It said risk-reward for the big-cap telcos remains largely balanced for now with no major mispricing apparent.

“We expect the overall degree of competition to remain relatively rational, with each of the Big 3 seeking to preserve average revenue per user as much as possible.

“Unlike in 2017 when a significant proportion of the street was bearish, the expectation is of a relatively stable year this year for the mobile market,” Maybank IB said.

Axiata, parent of Celcom, is the research house’s preferred stock among the big-caps, after pricing in Axiata’s earnings before interest, tax, depreciation and amortisation (Ebitda) recovery throughout the past year.

Mobile revenue is poised to improve somewhat going forward, following anticipation for a fourth consecutive year of decline in 2017.

Maybank IB said the revenue weakness largely stemmed from DiGi, which saw its service revenue drop 5.8% year-on-year in the first nine months of 2017, after a strategy shift in the first quarter of 2017 to deprioritise SIM sales and international direct dial voice.

“Encouragingly, quarterly trends for the Big 3 have been on a sequential uptrend since. Big 3 cumulative Ebitda is also set for growth in 2017, a consequence of cost optimisation initiatives by all telcos,” it said.

Consolidation and revenue generation could be on the cards for the sector which sees getting people to enjoy the pleasure of saying “hello” as boosting income.