Telco giants’ shaky 3Q results reflect industry shake-up


The telecommunications sector’s future continues to shudder due to uncertainties with major service providers pos-ting declines in their third quarter results ended Sept 30, 2018 (3Q18), but smaller players, seen as nimble and progressive, delivered improved performances.

Dominant fixed-line operator Telekom Malaysia Bhd (TM) posted its first quarterly net loss in 10 years, while Maxis Bhd and Celcom Axiata Bhd — two of the “Big 3” telcos — saw declines in 3Q18 earnings on squeezed margins in the prepaid business.

High-rise broadband service provider, TIME dotCom Bhd, reported a near-threefold jump in 3Q earnings due to revised industry pricing leading customers to jump ship in light of more competitively priced broadband packages available in the market.

Competition in the telco sector has stiffened following regulatory changes such as the implementation of the Mandatory Standard on Access Pricing enforced starting June 8 alongside the government’s call for cheaper and faster broadband.

In a recent research note, CIMB Investment Bank Bhd stated that it expects flattish industry mobile service revenue growth for the next three years, as intense competition re-emerges at some point.

Mobile industry service revenue slid 1.2% year-on-year (YoY) and 0.5% quarter-on-quarter (QoQ) in the 3Q after a “decent” 2Q18.

Malaysian telcos are trading at an 11% premium over the Asean average 2019F enterprise value/operating free cashflow of 13.5 times, with decent 2018-2019F yields of between 3.5% and 3.8%.

Downside risks include the upcoming auctions for the 700MHz/2,600MHz spectrums that could see higher than expected final prices amid more intense competition.

This could trigger a return of the telco wars of 2016, when local telcos rolled out all manner of products at competitive prices in an effort to boost average revenue per user and subscribers’ numbers.

CIMB noted the absence of major new headline promotions during the period from September to November although U Mobile Sdn Bhd’s GX50 unlimited plan remains in the market.

It also observed some “attractive limited time offers” at DiGi.Com Bhd retail shops, likely to combat competitive pressure in the lower-end segment.

“For now, the market is still largely stable, but we are watching if any of the Big 3 telcos launch low-priced fixed speed unlimited plans,” the research house said.

It said the prepaid market stayed active in September up to November, while the broadband segment was active with players fighting to retain and/or gain subscribers.

At end-September, TIME offered two to five times speed upgrades for the same price to existing fibre home broadband subscribers, in response to plan revisions at TM and Maxis, as well as regulatory pressures.

It then offered revised fibre broadband plans in October, at prices lower by as much as 34% to 54% for its 100Mbps and 500Mbps packages.

Maxis registered a 9% fall in net profit at RM513 million in the 3Q compared to RM564 million profit made a year ago as quarterly revenue slipped 3% to RM2.26 billion from RM2.33 billion the year prior.

The company said its service revenue for the period was 3% lower YoY at RM2.02 billion, mainly attributed to the drop in its prepaid segment.

Celcom’s net profit slipped 18.1% to RM194 million in the 3Q from RM237 million posted last year. Revenue was 10.4% stronger at RM1.81 billion against RM1.64 billion registered in 3Q17.

TM posted a net loss of RM175.59 million in the 3Q largely due to impairments on wireless and fixed network assets versus a net profit of RM211.82 million recorded last year.

Its 3Q revenue was marginally higher at RM2.95 billion against RM2.94 billion in 3Q17.

Its fixed-line broadband business is likely to continue facing significant headwinds, with the government pushing for more affordable and faster broadband services by opening up the market to more competition.

The group’s share price has plunged over 60% this year from above RM6 to RM2.61 last Friday, shrinking its market capitalisation from some RM22.7 billion at the start of 2018 to RM9.81 billion.

Investor sentiment has also been dampened by leadership departures at TM, which began after Malaysia elected a new government on May 9 this year.

Datuk Seri Mohammed Shazalli Ramly stepped down as MD and group CEO on June 6 and was replaced by Datuk Bazlan Osman as acting group CEO.

In November, Bazlan resigned to pursue other interests. His replacement is Imri Mokhtar, who was the group’s COO overseeing business operations.

Last Tuesday, former chairman Tan Sri Dr Sulaiman Mahbob resigned following cessation of office as director and chairman. He was replaced by telco veteran Rosli Man.

Meanwhile, DiGi’s earnings rose 2.1% to RM392.54 million in the 3Q from RM384.62 million achieved in the previous year as revenue increased 1.9% to RM1.6 billion from RM1.57 billion posted last year.

TIME’s earnings jumped near-threefold to RM79.98 million in the 3Q from RM28.23 million posted the year before.

The fixed broadband player, which has a niche in the high-rise home segment, saw revenue climbed 23.2% to RM250 million from RM203 million previously.

Overall, CIMB has a neutral stance on the sector. Its top pick is Axiata Group Bhd on expectations of a strong rebound in earnings forecast for financial year ending December 2019 and greater upside to share price.