TELECOMMUNICATION

Sector report Surprising rebound in 2Q subscribers

3 Sep 2020 OVERWEIGHT
Alex Goh (Maintained)
alexgoh@ambankgroup.com
03-2036 2280 Rationale for report: Sector update
Investment Highlights

 Total subscriber rose QoQ after MCO. After a drop in April–May, subscribers surprisingly rose after movement control order
(MCO) restrictions were relaxed, translating to a 121K QoQ increase to 30.4mil subscribers in 2QFY20. The largest gain was
in Maxis at 414K with a prepaid rise of 442K which was partly offset by a 32K decrease in postpaid users due to automatic
cancellation after non-payment beyond 30 days. Celcom also showed a similar trend with prepaid subscribers increasing by
60K while postpaid shrank by 14K. Only Digi showed a drop of both prepaid and postpaid users, leading to a total 338K loss.

 But a mixed 2QFY20 report card. The telco sector’s 2Q2020 results, which bore the full brunt of the MCO in April–June,
registered a mixed performance, with Digi and Axiata underperforming while TM outperformed due to significantly better cost
improvement. Digi’s service revenue was dented by lower subscribers, ARPU, roaming and voice contributions during the
MCO while Axiata’s earnings was dampened by higher deferred and overseas tax regimes. Maxis and Time dotCom’s
(UNRATED) results were within expectations despite travel restrictions slightly dampening their marketing activities.

 Only Digi officially revealed new guidance. Since April–May this year when telcos withdrew or were reviewing their
guidance to investors, only Digi officially provided a revised FY20F service revenue from a flat to low single-digit drop to low
single-digit decline and EBITDA decline of a medium single-digit. While Axiata has not reinstated its withdrawn FY20F
guidance during the analyst briefing, management affirmed expectations for a low single-digit decline in revenue and EBITDA
while TM’s new management under CEO Imri Mokhtar indicated a low-to-mid single-digit FY20F revenue drop due to the full-
year impact of Streamyx repricing on the retail segment.

 Lower celco earnings. As we had forewarned about weaker upcoming earnings in our sector update on 29 May 2020,
2Q2020’s celco core net profit fell by 11% QoQ to RM771mil due to the impact of the MCO which weighed on service revenue,
subscribers and ARPU. The worst affected was Celcom, which registered an 18% decline, followed by Digi at 13%.

 Weaker service revenues. Celcos’ service revenues dripped 8% QoQ to RM5.1bil largely from the prepaid segment for all
operators and to a lesser degree, the postpaid segment even though the subscriber base recovered towards the end of June.
This was exacerbated by a RM1/month decline in blended ARPU to RM45/month as both segments registered intense
competition.

 Maxis’ overall subscriber base maintains lead position. In 2Q2020, Maxis’ subscriber market share of 38.6% retained its
lead over Digi’s 35% while Celcom remained a distant third at 26%. This highlights Maxis’ postpaid subscriber focus and
convergence strategy with its fibre broadband services which have worked out better than Digi and Celcom’s. Recall that Digi
has held the leading subscriber market share from 1Q2016 to 4Q2019 due to its strength in the prepaid segment, underpinned
by the migrant population. However, Maxis has also overtaken Digi in the prepaid segment with the highest market share of
38%. Additionally, Maxis remains the leader in the postpaid segment with an ARPU and subscriber base which are higher by
16% and 25% respectively compared to Digi’s. While the postpaid segment accounts for 33% of Maxis’ subscriber base, it
makes up 59% of the group’s 2QFY20 group service revenue.

 Intense competition for fixed and mobile segments. Amid the intense mobile competition with U Mobile, Digi has halved
its entry-level plans for both postpaid and prepaid packages in an attempt to stave off the loss in market share. Recall that
Digi has launched a postpaid package priced at RM38/month for 9GB of data and unlimited calls, halving its current postpaid
offering of RM80/month for 40GB base data with another 40GB loyalty data. In June, Digi also launched its Internet Chili Padi
prepaid plan offering 3GB and unlimited social media (Facebook, Instagram and Twitter) at only RM15/month, half of its
2QFY20 prepaid ARPU of RM29/month. In the fibre broadband market, TM’s unifi has been more aggressive in competing
for market share with recent promotions of free 42” Sharp TV sets and redemption of the RM500 penalty fee for switching
from Maxis Home Fibre. In Peninsular Malaysia, Celcom and Digi have begun to target selectively market segments in the
Klang Valley for their fibre-to-home offerings.

 Consolidation on the way. As we highlighted on 11 August 2020, declining data yields, the government’s national fiberisation
plan, new 5G spectrum fees and capex pressures are likely to drive players to seek consolidation amongst themselves to
reduce costs, secure economies of scale and reduce rivalry. While the MCMC has shown a preference for maintaining
competitive pressures to provide reduced broadband prices for consumers, we view that the industry’s stagnant revenue
trajectory will eventually drive the sector towards more merger and acquisition activities, which are viewed as inevitable during
Axiata’s analyst briefing last week.

 Maintain OVERWEIGHT with BUY calls for TM, which has shown significant cost improvements together with more
compelling dividend yields and Axiata, offering bargain EV/EBITDA valuations with multiple opportunities for monetisation as
the group aims for higher dividend payout policies.
 Telecommunication Sector 3 Sep 2020

EXHIBIT 1: VALUATION MATRIX

Price FV Up/down Mkt Cap Enterprise Val. EV/EBITDA (x) EPS growth (%) PE (x) ROE (%) NDPS (sen) Div Yld (%) Net debt/FY20F
side
Stocks Call (RM) (RM) (%) (RMmil) FYE (RMmil) FY20F FY21F FY20F FY21F FY20F FY21F FY20F FY20F FY20F EBITDA (x)

Axiata BUY 3.03 4.50 48.5 27,766 Dec 40,368 3.9 3.7 (63.9) 64.8 52.8 32.1 2.4 9.5 3.1 1.6
Maxis HOLD 5.10 5.50 7.8 39,865 Dec 48,230 13.0 12.2 19.0 20.3 26.8 25.2 20.3 19.0 3.7 2.4
Digi HOLD 4.10 4.40 7.3 31,878 Dec 36,570 11.6 11.1 (13.5) 7.2 25.7 24.0 223.9 15.9 3.9 1.4
Telekom BUY 4.23 5.05 19.4 15,896 Dec 22,970 5.8 5.6 28.2 28.3 15.0 15.0 13.0 17.0 4.0 1.6
Source: AmInvestment Bank

EXHIBIT 2: REVENUE BREAKDOWN EXHIBIT 3: REVENUE CHANGES

RMmil
400

300

200

100

(100)

(200)

(300)

Celcom Maxis Digi

Source: Bursa Malaysia
Source: Bursa Malaysia

EXHIBIT 5: EBITDA MARGIN

EXHIBIT 4: EBITDA BREAKDOWN

Source: Bursa Malaysia

Source: Bursa Malaysia

AmInvestment Bank Bhd 2

Telecommunication Sector 3 Sep 2020

EXHIBIT 6: EBITDA CHANGES EXHIBIT 7: PATAMI BREAKDOWN

RMmil
400

300

200

100

(100)

(200)

(300)

(400)

(500)

(600) Source: AmInvestment Bank

Celcom Maxis Digi

Source: AmInvestment Bank

EXHIBIT 8: PATAMI CHANGES EXHIBIT 9: PATAMI MARGIN

RMmil
200
150
100
50
0
(50)
(100)
(150)
(200)
(250)
(300)

Celcom Maxis Digi

Source: AmInvestment Bank

Source: AmInvestment Bank

EXHIBIT 10: MOBILE SUBSCRIBERS EXHIBIT 11: MOBILE SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 3

Telecommunication Sector 3 Sep 2020

EXHIBIT 12: PREPAID SUBSCRIBERS EXHIBIT 13: PREPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides Source: Companies’ investor presentation slides

EXHIBIT 14: POSTPAID SUBSCRIBERS EXHIBIT 15: POSTPAID SUBSCRIBER CHANGES

Source: Companies’ investor presentation slides

Source: Companies’ investor presentation slides

EXHIBIT 16: PREPAID ARPU EXHIBIT 17: PREPAID ARPU CHANGES

RM/month QoQ
RM/user
4 1.5
3 1.0
2 0.5
1
-
0
(0.5)
(1)
(1.0)
(2)
(3) (1.5)
(4) (2.0)
(5) (2.5)
Maxis Celcom Digi Average

Source: Companies’ investor presentation slides

Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 4

Telecommunication Sector 3 Sep 2020

EXHIBIT 18: POSTPAID ARPU EXHIBIT 19: POSTPAID ARPU CHANGES

RM/month QoQ
RM/month
10 6.0

4.0
5
2.0

-
0
(2.0)

(4.0)
(5)
(6.0)

(10) (8.0)
Maxis Celcom Digi Average

Source: Companies’ investor presentation slides

Source: Companies’ investor presentation slides

EXHIBIT 20: BLENDED ARPU EXHIBIT 21: BLENDED ARPU CHANGES

Source: Companies’ investor presentation slides

Source: Companies’ investor presentation slides

AmInvestment Bank Bhd 5

Telecommunication Sector 3 Sep 2020

DISCLOSURE AND DISCLAIMER

This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”) without
regard to your individual financial circumstances and objectives. Nothing in this report shall constitute an offer to sell, warranty,
representation, recommendation, legal, accounting or tax advice, solicitation or expression of views to influence any one to buy
or sell any real estate, securities, stocks, foreign exchange, futures or investment products. AmInvestment recommends that
you evaluate a particular investment or strategy based on your individual circumstances and objectives and/or seek financial,
legal or other advice on the appropriateness of the particular investment or strategy.
The information in this report was obtained or derived from sources that AmInvestment believes are reliable and correct at the
time of issue. While all reasonable care has been taken to ensure that the stated facts are accurate and views are fair and
reasonable, AmInvestment has not independently verified the information and does not warrant or represent that they are
accurate, adequate, complete or up-to-date and they should not be relied upon as such. All information included in this report
constitute AmInvestment’s views as of this date and are subject to change without notice. Notwithstanding that, AmInvestment
has no obligation to update its opinion or information in this report. Facts and views presented in this report may not reflect the
views of or information known to other business units of AmInvestment’s affiliates and/or related corporations (collectively,
“AmBank Group”).
This report is prepared for the clients of AmBank Group and it cannot be altered, copied, reproduced, distributed or republished
for any purpose without AmInvestment’s prior written consent. AmInvestment, AmBank Group and its respective directors,
officers, employees and agents (“Relevant Person”) accept no liability whatsoever for any direct, indirect or consequential
losses, loss of profits and/or damages arising from the use or reliance of this report and/or further communications given in
relation to this report. Any such responsibility is hereby expressly disclaimed.
AmInvestment is not acting as your advisor and does not owe you any fiduciary duties in connection with this report. The
Relevant Person may provide services to any company and affiliates of such companies in or related to the securities or
products and/or may trade or otherwise effect transactions for their own account or the accounts of their customers which may
give rise to real or potential conflicts of interest.
This report is not directed to or intended for distribution or publication outside Malaysia. If you are outside Malaysia, you should
have regard to the laws of the jurisdiction in which you are located.
If any provision of this disclosure and disclaimer is held to be invalid in whole or in part, such provision will be deemed not to
form part of this disclosure and disclaimer. The validity and enforceability of the remainder of this disclosure and disclaimer will
not be affected.

AmInvestment Bank Bhd 6