THE sharp selldown of telco stocks in the week leading up to the announcement of the Movement Control Order (MCO) on March 16 by Prime Minister Tan Sri Muhyiddin Yassin has resulted in attractive valuations to emerge, said AmInvestment Bank.
“In our view, these negative sentiments are over-exaggerated as these Covid-19 movement restrictions are unlikely to dampen the earnings prospects of fixed broadband and cellular operators,” said its analyst Alex Goh.
He added that the restricted movement is more likely to drive up mobile data demand, which has already been experiencing explosive growth over the past five years.
AmInvest upgraded the sector to overweight, citing that the valuations of Maxis Bhd and Digi.Com Bhd have become attractive given the recent price drops. This also leads to upgrades for Maxis and Digi to buys, with unchanged fair values of RM5.76 and RM4.70 respectively.
A buy call is also maintained on Axiata Group Bhd, with Goh citing the low enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) valuations and rising prospects for the monetisation of its multiple businesses.
However, Telekom Malaysia Bhd remains a hold against the backdrop of government-targeted fiberised average revenue per user (ARPU) reductions under the National Fiberisation and Connectivity Plan (NFCP).
Goh noted that the sales revenue of these operators will only increase if a significant number of existing or new subscribers switch to higher value packages, given the pricing structure of fibre and 4G packages.
However, he noted that this is less probable, given the MCO is expected to last only 14 days, while mobile users would more likely deploy home or office WiFi connected to fibre broadband, which are mostly unlimited data plans.
On a year-on-year basis, the service revenue for cellular operators in the fourth quarter of the 2019 financial year slid 1% due to a 10% contraction from Celcom’s declining subscriber base, which was partially offset by Maxis’ growth of 6%.
“However, on a quarter-on-quarter (qoq) comparison, their service revenues rose 8.7% to RM6 bil on postpaid segment growth and seasonally higher device sales, largely driven by a sharp increase of 13% qoq from Maxis,” Goh said, adding that this was further supported by blended ARPU rising slightly by RM1 per month qoq to RM48, which he attributed to the increase in postpaid subscribers.
Goh also noted that mobile competition remains intense, with total subscriber trajectory continuing its downward trend in 4Q19.
“Mobile subscribers decreased by 643,000 qoq as prepaid declines of 841,000 were only partially offset by postpaid additions of 198,000. Only Maxis registered an 88,000 net increase, while Celcom fell by 251,000 and Digi by 480,000,” said Goh.
However, Goh remained cautious on the possibility of higher-than-expected increases in operating and capital cost requirements for 5G, stating that operators need to further upgrade their network infrastructure for 5G rollouts.
He also warned that the sector could be de-rated should revenue declines resume, considering the backdrop of an escalated mobile price war and the looming sharp drops in fixed broadband prices this year, driven by NFCP prerogatives. – March 18, 2020
