The heat is on in the domestic telecommunications space, as a result of the government’s reiterated call for faster broadband at half the price and the reintroduction of the Sales and Services Tax (SST).
Among local telecommunications companies (telcos), the spotlight is on Telekom Malaysia Bhd (TM) that might see its dominance in the fixedline broadband space via its UniFi brand under threat, following regulatory changes that are allowing other operators to come in as last-mile providers in the broadband space.
JPMorgan Securities (M) Sdn Bhd in a recent research note said its initial talks with local telcos following the implementation of the Mandatory Standard on Access Pricing (MSAP) — which allows other players to resell fixed broadband at regulated prices — had indicated that it is now economically feasible, if not lucrative, to enter the fixed segment.
Mobile operator Maxis Bhd, which also offers fibre broadband, has now launched two new MaxisONE Home Fibre plans priced at RM89 per month for 30 megabits per second (Mbps) and RM129 per month for 100Mbps, which it claims are priced between 36% and 65% lower than previous similar plans, while offering unlimited Internet.
“Hence, in addition to market share losses, MSAP could result in pressure on TM’s premium pricing.
“However, new entrants’ success will also depend on any logistical challenges in gaining access to TM’s network and dispute resolution process,” JPMorgan said.
It said the second half of 2018 (2H18) is likely to be challenging for TM due to the impact from MSAP, while TM’s enterprise/government revenues could also remain subdued due to the macro environment.
In the second quarter of 2018 (2Q18), TM’s losses associated with minority interests increased 5% yearon- year, which suggests losses within the mobile segment are increasing as TM owns about 73% of UniFi mobile.
Kenanga Investment Bank Bhd downgraded TM to ‘Market Perform’ from ‘Outperform’ previously on unfavourable changes in regulation, stiffer fixed broadband competition and higher than expected operating expenditure.
Tapping into M40 Households
It noted that TM’s move to make available its UniFi Basic plan to all households, while allowing the group to tap into the non-subscriber middle 40% (M40) households, also increases the risk for existing subscribers to trade down their current subscription plans in view of the “huge price gap”.
“We also do not discount subscribers may consider switching to a key rival’s offer (Maxis) given the small difference in price, but with higher value in the latter’s package,” it said in a recent report.
MIDF Amanah Investment Bank Bhd lowered its call on TM to ‘Sell’ from ‘Neutral’, citing increasing regulatory and competitive pressures are negatively impacting all the group’s business segments which would likely persist in the immediate term.
“The availability of UniFi Basic to all market segments could lead to TM’s UniFi customers downgrading their respective broadband packages, should monthly usage not exceed 60GB. This would put downward pressure on UniFi average revenue per user.
“We are concerned with the group’s ability to manage operating expenses efficiently. Its total cost as a percentage of revenue has increased steadily beyond 90%. Due to earnings pressure and the group’s capital expenditure (capex) commitment for long-term growth, we expect its dividend payment to decline as well. We view that dividend yield will hover around 3% only,” it said.
Maybank Investment Bank Bhd (Maybank IB) also downgraded TM to ‘Hold’ from ‘Buy’, with anticipation for the group to discontinue its minimum RM700 million dividend policy.
The group did not declare an interim dividend after its 2Q18 results were released — a first since at least 2007.
“TM’s dividends have been RM700 million or more since 2012. Back-ofthe- envelope calculations indicate that TM’s free cashflow is likely to be well below RM700 million in the near to mid term.
“Moreover, TM’s gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) has increased to 2.6 times in June 2018, while net debt to Ebitda has grown to 2.07 times,” JPMorgan added.
Long-Term Outlook
Meanwhile, BIMB Securities Sdn Bhd said the long-term outlook appears intact for TIME dotCom Bhd that controls a niche segment in urban highrise dwellings, as growing demand for data is expected to underpin bandwidth demand.
BIMB also maintained a ‘Buy’ call on TIME, with caution that some weakness in 2H18 is expected amid growing competition within the fixed broadband space.
Still, BIMB said TIME can mitigate the impact in the medium term by leveraging on its strong branding and economies of scale.
Maybank IB maintained its ‘Hold’ recommendation on TIME, adding that it has yet to incorporate the impact from potential pricing changes in the retail segment into its forecasts.