Consolidation necessary to catalyse change in telco sector
KUCHING: AmInvestment Bank Bhd (AmInvestment Bank) does not discount the possibility of sector earnings cuts if incumbents further exacerbate the already intense competition for market share.
The research firm in a strategy report earlier this week remained convinced that sector consolidation is impending, which is likely to be spearheaded by the re-merger of Celcom Axiata Bhd and Telekom Malaysia Bhd (TM).
This comes as competition in the mobile segment remains intense, as total subscribers fell by 3.2 million since the first quarter of 2014, of which 89 per cent stemmed from the prepaid segment.
“About 61 per cent of the loss came from Celcom, 28 per cent from Maxis and the rest from Digi,” it detailled in the note. “Average revenue per user (ARPU) was relatively resilient since 1Q2016 but upside growth is restricted by the price-sensitive market.
“In our view, near-to-medium term earnings catalysts appear weak given the likelihood of further intensification in the telco wars with U Mobile and Digi raising the ante against Webe’s unlimited mobile data/voice/SMS pricing plans.”
AmInvestment Bank said further capital expenditure is needed in new spectrum offerings by the end of the year.
“Celco players need to maintain a healthy balance sheet to meet the additional capex requirements for upcoming spectrum rebalancing exercises, mainly the 2,600MHz and 700MHz bands, which are needed to provide improved 4G connectivity,” it added.
“Currently, the only telco protected from this disastrous competition is Time dotCom with its fibrerised broadband strategically positioned with backhaul, enterprise and retail services to cater to rapidly expanding data demand.
“While it has much more attractive broadband packages versus TM’s Unifi, Time dotCom’s services are only available for dense population centres such as commercial hubs and high-rise developments.
“Sector upgrades only if prospects for stronger earnings momentum materialise. A sector re-rating requires catalysts for stronger earnings growth prospects demonstrated in subscriber, ARPU and margin expansion.
“As the global landscape for rapid data trajectory is driven by lower price plans and increasingly expensive capex rollouts to provide 4G capabilities, coverage and service quality, any significant organic revenue or margin growth improvement is unlikely over the next 12 months.”
As TM continues to promote its re-launched webe service, albeit with a small estimated subscriber base currently, AmInvestment Bank did not discount the possibility of sector earnings cuts if incumbents further exacerbate the already intense competition for market share.
“Main synergistic benefits from an Axiata-TM merger are the complementary suite of services which Axiata’s mobile services can integrate into TM’s fixed line operations to draw further mobile market share from the other players Maxis, Digi and U Mobile.
“However, the more immediate earnings impact from an AxiataTM merger will be cost efficiencies from the reduction in redundancies for head office expenses, network operating centres, marketing costsand procurement management.
“Assuming a 10 per cent cost reduction would mean substantial annual savings of RM2.1 billion, three per cent of the combined group’s market capitalisation.”