AFFIN Hwang Capital Research has maintained its neutral call on the telecommunications (telco) sector, given its lacklustre growth, but it is compensated by dividend yields of 3%-4%. 

“All in, we maintain our neutral rating for the sector. The sector’s uninspiring earnings trajectory is somewhat cushioned by its relative resilient earnings during times of heightened economic uncertainty, relatively lower foreign shareholdings and dividend yields of 3%-4%,” the research house said in a note on March 9.

For exposure, the research house picked Maxis Bhd with a hold call for its superior network infrastructure and positive earnings outlook.

“Maxis is now our preferred pick on a relative basis for its superior network infrastructure, positive earnings outlook, stable dividend and first-mover advantage in developing converged solutions for individuals, homes and businesses.

“Operationally, 2019 was a good year for Maxis as it grew its cellular subscribers (subs) while Digi.Com Bhd and Celcom Axiata Bhd skidded. Financially, however, Maxis fared the worst with a 15% decline in 2019 core net profit,” it pointed out. 

In the final quarter of 2019, Maxis grew its cellular subs by 3.2% year-on-year (yoy) while Celcom’s cellular subs dropped 7.8% yoy and Digi’s was 3.3% lower.

“Maxis’ outperformance was, in our view, driven by its strong branding in the postpaid segment and its active marketing push for entry-level postpaid packages,” said Affin Hwang.

It added that Maxis’ ex-wholesale service revenue posted three consecutive quarters of growth due to the increase in the number of subs, and despite declining postpaid average revenue per user.

In 2019, Maxis and Digi posted lower profits due to lower service revenue and higher operating/depreciation charges.

Maxis outperformed its peers in terms of revenue growth in Malaysian operations but underperformed on earnings realisation due to high upfront costs relating to its aggressive expansion plans.

Maxis has a positive earnings guidance, forecasting a flat to single-digit increase in its 2020 earnings before interest, taxes, depreciation, and amortisation (Ebitda) while Digi expects 2020 Ebitda to be flat to a low single-digit decline.

Meanwhile, TM expects lower revenue and gave a cautious 2020 Ebit guidance of “over RM1 bil” while Axiata remained positive and guided for 4% to 5.5% growth in 2020 Ebitda.

The key downside risks, it said, include higher price competition that erodes average revenue per user (ARPU), unexpected increase in operating costs and change in 5G spectrum award mechanism.

“Possible upside surprises are sector consolidation and strong growth in the enterprise/SME business segments. Under our base-case investment thesis, we expect the competitive landscape to remain stiff but rational. 

“On the spectrum/network infrastructure development, we anticipate the telcos to undertake more collaborative initiatives to better utilise/reduce capex on infrastructure. These initiatives should help contain telcos’ capex and opex, thereby sustaining their profitability amid the weak revenue outlook.”

The impact from Covid-19 outbreak

“The outbreak, we believe, has two impacts on the telcos’ business outlook. Firstly, the outbreak has discouraged cross-border travelling (business and leisure) that should, in turn, affect the telcos’ subs growth (inbound tourists) and ARPUs (outbound). 

On the other hand, the research house said the rise in work-from-home arrangements and video/teleconference calls should increase the consumers’ data/voice consumption and increase the revenue from the business segments. 

“Nonetheless, we gather that the earnings uplift from the work-from-home/conference calls will likely be minimal (if any). Most companies expect these practices to be temporary and unlikely to affect their revenue. Similarly, we do not expect the lower cross-border travelling to have a material impact on the telco’s earnings. 

“All in, the negative impacts from Covid-19 should outweigh the positive, albeit slightly,” said the research house. 

Maxis’ share price opened 1.1% lower at RM5.38, Celcom Axiata 0.25% higher at RM3.97, Digi 0.95% lower at RM4.18 and TM lower by 3.88% at RM3.59 before the midday break on March 9. – March 9, 2020