AmInvest Research stays neutral on telcos, buy calls for Axiata, Telekom

AmInvestment Bank Research is retaining its neutral call on the telecommunications sector due to the continued intense competition in both the mobile and fixed broadband markets.

It said on Tuesday it retained its buy calls for Axiata and Telekom due to the game-changing merger possibility which could significantly enhance their earnings and market share trajectory.

“From a shareholder’s perspective, the main synergistic benefits from a potential Axiata-Telekom merger are the complementary suite of services which Axiata’s mobile services that can integrate into Telekom’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 Axiata-Telekom merger will be cost efficiencies from the reduction in redundancies for head office expenses, network operating centres, marketing costs and procurement management,” it said.

AmInvest Research said however, Maxis and Digi are still on its hold list due to the headwinds in gaining revenue growth traction.

The research house said it met up with the Malaysian Communications and Multimedia Commission (MCMC) senior management last week.

Salient highlights:

* No change in the new Pakatan Harapan government’s broadband goals, which is to achieve a 95% broadband coverage via fixed, wireless and mobile solutions for the whole country, including East Malaysia under the 11th Malaysia Plan. The current penetration rate is 85% and appears poised to reach the target.

Recall that the plan involved key infrastructure rollout initiatives such as High-Speed Broadband 2 (HSBB 2), Suburban Broadband (SUBB) and Digital Terrestrial Television (DTT) together with policies to improve access pricing and consumer protection frameworks.

* More competition remains the MCMC’s goal as part of its overall strategy to lower costs and deliver improved services.

As such, the regulator is open to new entrants in broadband, wireless, LTE or mobile virtual network operator (MVNOs).

Hence, the MCMC has not adopted a preference for mergers amongst the current operators.

* Drive to lower costs by encouraging the sharing of network and facility infrastructure amongst telco operators to optimize efficiencies. This is exemplified by the current backhaul, broadband and domestic roaming collaboration between Axiata and Telekom.

Minimal costs needed for fibre speed upgrades. The MCMC reaffirmed that minimal capex is needed to upgrade data speeds over fibre broadband given that the network has already been built while the costs to change electronic components should be insignificant.

* Embracing Industry 4.0 to spur manufacturing-based industries’ digitalisation transformation driven by connected technologies whereby “smart factories” deploy cyber-physical systems to monitor real-time physical progress and make decentralised autonomous decisions. An area of emphasis would be to encourage ICT adoption by small-medium enterprises from 50% currently to 100%.

Even after the completion of HSBB2 and SUBB, the MCMC highlighted that there could still be a gap in population coverage which may require other types to wireless solutions to attain full nationwide access.

* As such, new incentives may be required from the government to provide connectivity to remote areas.

AmInvest Research said in its view, near- to medium-term revenue growth outlook remains weak given the likelihood of further intensification in the mobile wars, with Digi and Celcom likely to raise the ante against U Mobile’s packages.

“As U Mobile wrestles for new customers on the unlimited mobile data arena amid rising competition in the fibre segment, we do not discount the possibility of sector earnings cuts if incumbents up the ante to further exacerbate the already intense competition for market share.