RHB Maintains Neutral Call For Telco Industry

The recently concluded reporting season saw fixed-line core earnings growth of 27% year-on-year in the fourth quarter of 2022, beating the mobile segment’s -16.2% year-on-year.

Most telcos delivered in-line results, with Axiata outperforming for the consecutive second quarter. RHB Research in its Malaysia Sector Update report today continues to prefer the fixed-line players owing to their more visible catalysts and structural drivers.

They maintained a “neutral” recommendation, with Telekom Malaysia being the top pick. RHB also views OCK favourably due to its strategic exposure to 4G/5G site deployments and the undemanding valuation. 

Mobile service revenue (MSR) should see further improvements. Industry MSR grew 2.3% year-over-year in the fourth quarter of 2022 (+0.9% quarter-over-quarter), the strongest year-over-year growth since the pandemic (2022: +1.3%).

RHB sees a further recovery in the financial year 2023 future (low single-digit growth projected) from stronger roaming and prepaid revenues (higher migrant traffic).

Economic headwinds, however, should continue to temper the industry average revenue per user with tactical promotions targeted at the lower-end/price-sensitive segment.

RHB also learnt from CelcomDigi (CDB) that the network request for the proposal process has concluded with the terms being finalised. This should pave the way for the commencement of site integration works.

CDB plans to shut down c.6 to 7k sites (of over 23k nationwide) over 18 to 24 months. The guided integration synergies (net present value of RM 8 billion over five years) are likely to be backloaded, in their view, as operating expenditure and capital expenditure should remain elevated in the financial year 2023 future from merger-related costs.

CDB booked RM 190 million in merger-related and one-off costs in the fourth quarter of 2022. Aggregate fixed line revenue fell 3.4% quarter-over-quarter (-5% year-over-year) in the fourth quarter of 2022, mainly due to lower indefeasible rights of use sales and international voice revenue at TM.

Meanwhile, overall industry for the year 2022 revenue grew 6%, with sustained double-digit revenue growth at Time dotCom. The new access price framework which came into effect on 1 Mar saw Layer 3 service gateway prices decline by 51-65% vs the initial 41-52% decline proposed by the regulator in its public inquiry paper.

They expect the discussions with fibre wholesale access seekers on new commercial agreements to be completed by mid-year. RHB previously assumed a 5-10% impact on TM’s uniFi average revenue per user for FY23-25F from lower access prices.

In the 2018 access price revision, uniFi’s average revenue per user fell  c.21% between 2018 and 2020, with the impact partially mitigated by stronger subscriber growth and promotions. 

The government is expected to announce its decision on the 5G implementation policy by the end of March. RHB views the current 5G rollout by Digital Nasional Bhd continuing as population coverage has surpassed 50%, although, with refinements to the operating model which could translate into lower wholesale costs for telcos.

Key risks listed by RHB are competition, weaker-than-expected earnings, and regulatory and/or policy upheavals.

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