(Overweight) Postpaid Game Plan

Transcription

1 Rm million Rm million M&A Securities Sector Update: Telecommunication (Overweight) PP14767/9/212(3761) Telecommunication Sector (Overweight) Postpaid Game Plan Friday, June 1, 216 We maintain our Overweight call on telecommunication sector in view of 1) stable dividend 2) leaner operating cost 3) impact from stronger Ringgit i4) potential wider margin on 4G s roll out. Our top pick for the telecommunication sector is Digi with a BUY call and TP of RM5.75 pegged at EV/EBITDA of 14.5x. results improving. The recently concluded results signaled telcos improving earnings on q-o-q basis, but tumbled on y-o-y basis. Despite the modest fall in service revenue, we deem the results satisfactory given intensifying competitions, particularly in the postpaid segment. Service revenue was relatively healthy at this level at we noticed telcos specifically targeting selected segment. Three telcos reported earnings in line with ours estimates, whilst Axiata missed our estimates, weighed by weaker Celcom performance. TM surprised the streets as its earnings were assisted by stronger forex impact despite elevating losses by P1, while Digi earnings were assisted by steady service revenue in both postpaid and prepaid segment. Maxis earnings were supported by service revenue in postpaid segment, raking-in benefit from MaxisOne promotional activities. Entering 2H16, we foresee telcos will face further challenge to deliver earnings given modest growth guidance by the management and that could ensure the lackluster share price performance to continue though valuations deem attractive at current price Telco Earnings 6, 5, 4, 3, 2, Telco Revenue Source: Company, M&A Securities ext. 257,229,221,249,258 1

2 RM million Service revenue remains challenging. The escalating competitions have started affecting profitability, with greater effect felt in the prepaid segment as proved by declining prepaid ARPU by Celcom and Digi. Refreshingly Maxis was able to sustain its prepaid ARPU. The heightened competitions saw telcos lost its prepaid subscribers at the expense of Mobile Virtual Network Operator (MVNO) as well as efforts to convert prepaid subscribers into postpaid. Notwithstanding that, there are no further rooms for competitions in the prepaid segments as telcos had spurred enough varieties of freebies, including free data usage that hurt ARPU. Telco Service Revenue Telco Service Revenue q-o-q (1Q13-) 2, 2, 1, 2,127 2,94 2,158 2,16 2,127 1,734 1,676 1,687 1,646 1,518 1,588 1,589 1,584 1,587 1,56 4% 2% % -2% -4% -6% -8% -1% Celcom Digi Maxis Celcom Digi Maxis Indicators show improving sign on the back of competition. Despite escalating competition in the both prepaid and postpaid segment, the competitive landscape still had not imposed any adverse impact on profitability, no thanks to steady revenue from postpaid (49% of mobile revenue) led by Maxis that commands commendable 57% EBITDA. Nevertheless, we noticed that ARPU posted was under pressure weighed by slower subscriber additions coupled with data centric package that hurt ARPU. EBITDA was still healthy at this level as the decision on slowing down the device sales led to the surge in EBITDA coupled with effective cost management ext. 257,229,221,249,258 2

3 Pecentage (%) RM million 6% Telco EBITDA Margin 2, Telco EBITDA 5% 4% 3% 2, 1, 2% 1% % Source: Company, M&A Securities EBITDA margin cap the declined. Overall, it was better performance in terms of expenses as telcos reported enviable cost management while reducing handset subsidies has halted the pressure on opex. Additionally, stronger Ringgit against USD has bumped up telcos forex gains, as it reduced the traffic cost that denominated in the USD. In, only Axiata posted weaker EBITDA in on q-oq basis weighed by Celcom that continued to struggle in the topline that caused by lower subscribers and a decline in ARPU. Digi s EBITDA margin surged to 42.6%, thanks to better service revenue growth as well as higher operational efficiency. Maxis EBITDA margin has improved to 57% on the back of higher revenue and effective cost management. Battlefield in the postpaid segment. The competition in the postpaid segment intensified as all the big 3 including UMobile had unleashed their data centric postpaid plan. For, only Maxis failed to expand its postpaid subscribers (-69k q-o-q) at the expense of Celcom and Digi that introduced competitive postpaid plan. Digi and Celcom have reacted fast to the changes in the market that required large data as compared to Maxis that needed time to tweak their offerings. Entering into 2Q16, we expect Celcom and Digi will rake satisfactory subscriber growth given their competitive offerings. Nevertheless, the prepaid market is expected to add more competitions as TM-P1 is set to launch its LTE mobile services in 1H16, which could provide a credible threat in view of P1 valuable spectrum assets (85Mhz, 2.3Ghz and 2.6Ghz) not to mention the ability to leverage on TM s extensive network ext. 257,229,221,249,258 3

4 Too crowded prepaid segment. Digi s pole positions in the prepaid segment is unchallenged given its strong execution, especially in the foreign worker/migrant segment though its ARPU had dropped significantly due to aggressive freebies policies to entice subscribers. Digi is not alone in experiencing the drop in prepaid ARPU in as other telcos were feeling the pressure from persistent IDD price competitions that weighed on ARPU. For the rest of 216, we believe telcos will put forceful strategy to stop prepaid ARPU from falling by creating service plans for different customer segments. LTE network to intesify. We noticed that all telcos had intensified their capex spending in 216 to rush the roll out of LTE network given the rising 4G smartphones in the market especially the smartphones from China. For Digi, they are playing catch up game with Maxis to match the 71% LTE coverage as at. Digi s LTE coverage stood at 65% in. We understand Digi is keen to rush its LTE rollout given its efficiency in data monetization and higher smart phone utilization that can potentially surge their service revenue further. Spectrum re-allocation to spur competition. The decision of Malaysian Communication and Multimedia Commission (MCMC) to reshuffle the spectrum allocation may provide an edge to Digi and UMobile as both will receive 1MHz in the 9MHz bandwidth. MCMC has opted for upfront assignment fees instead of an auction for reallocation exercise that may save UMobile and Digi significant cashflows. We understand UMobile is mulling its option to raise capital, including bond issuance or an IPO. For Digi, the money could be used to get on track of its LTE rollout. Recommendation. Despite intensified competitions so far, we maintain our OVERWEIGHT call on telecommunication sector due to the full impact of LTE network as well as the ability of telcos to convert the current prepaid subscribers into postpaid to stop the sliding ARPU in the prepaid. Attractions on the sector include of 1) stable dividend 2) leaner operating cost 3) impact from the stronger Ringgit i4) potential wider margin on 4G s impact. Our top pick for telecommunication sector is Digi with a BUY call and TP of RM5.75 pegged at EV/EBITDA of 14.5x. Table 1: Peers Comparison Company FYE Div Price EPS (RM) P/E (x) P/B (x) ROE Yield (RM) (%) FY16 FY17 FY16 FY17 FY16 FY17 (%) TP Call Axiata Dec Hold Maxis Dec Hold Digi Dec Buy Telekom Dec Hold Time DotCom Dec NR NR Average Source: Bloomberg, M&A Securities ext. 257,229,221,249,258 4

5 M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +1% over the next 12 months. TRADING BUY Share price is expected to be +1% within 3-months due to positive newsflow. HOLD Share price is expected to be between -1% and +1% over the next 12 months. SELL Share price is expected to be -1% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities Sdn Bhd (1517-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 592 Kuala Lumpur Tel: Fax: Website: ext. 257,229,221,249,258 5