Telco Sector. (Overweight) Competition Heating Up

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1 M&A Securities Sector Update: Telecommunication (Overweight) PP14767/09/2012(030761) Friday, April 15, 2016 Telco Sector (Overweight) Competition Heating Up We maintain our overweight call on telecommunication sector in view of i) stable dividend; ii) steady net addition in both prepaid and postpaid segment; iii) potential wider margin on 4G s impact. Our top pick for the telecommunication sector is Digi with a BUY call and TP of RM5.90 based on last 3-year average EV/EBITDA of 14.6x. Competitions in postpaid segment. Market is now heating up with several competitive offerings especially in the postpaid segment. With prepaid segment seemingly overcrowded with competition from Mobile Virtual Network Operator (MVNO), market is now moving to battle in postpaid segment with all telcos have introduced data centric package to entice their customers. We reckoned the changes in competition offered by telcos, started from entry level postpaid plan in earlier April 2015 into data centric usage up to 10gig per month currently. The data-centric offerings from telcos have managed to enlarge their subscriber base, especially offerings from Celcom and Digi with interesting features in the package. Celcom offering changed market landscape. The absence of new package did some damage to Celcom as it wipe away subscribers for several quarters. However it was unavoidable as Celcom were trying to improve their IT platform before it launch the new package. However, we deem its was worth the wait as Celcom introduced a new package in postpaid and prepaid segment that changed the way market operates as the package managed to enlarge their subscribers base in both postpaid and prepaid segment. Celcom unique offering such as larger data usage up to 10gig per month and rollover unused data are now became a trend with Digi follow the footsteps. Though the packages are unhealthy in term of financials, however the packages managed to gained popularity and Celcom managed to enlarge customer base. Digi follow Celcom footstep s. Despite the current data package still competitive that garnering respectable amount of subscriber, Digi revamps its postpaid offering with more data and internet rollover features. Digi add at least 1gig of data into current package with previous RM48 for 2gig are now revamped to 3gig of data. Despite its pricing higher than Celcom for 10gig of data for RM98, we still believe the package its still attractive with its unlimited call features. We reckoned that Digi revamping its products at timely as its suited subscriber s change in needs and this enable Digi to stay competitive with its competitiors. Maxis delay in introducing new products cost them. Maxis enjoys respectable addition of subscribers for the in both postpaid and prepaid segment post restructuring of its organization in Nevertheless, we deem that Maxis are late in responding to the customer change in preferences. Especially for the data centric subscribers as Maxis packages are at the higher side of 1

2 pricing given its worry-free proposition. Following recent social media rage about Maxis, Maxis has finally upgraded their new MaxisOne plan to stay competitive. Nevertheless, we deem that Maxis upgraded data package is still lacking especially in term of price where Celcom and Digi are offerings better deal for the similar amount of data. Maxis promised to unveiled its new plan in May 2016, however we are worry about Maxis ability to match Celcom and Digi offerings and their rollover internet features. We projecting that Maxis will lost its postpaid subscriber base should the plans are going to be launched unable to match Celcom and Digi s packages. Changing spot. Tough its still early to judge, we believe Maxis number 2 spot in postpaid segment will come under threat given recent social media rage. Digi and UMobile are hoping to climb the position by capitalizing on Maxis blunder though we expect its still a long way to go given 8 million differences in postpaid subscriber alone between Maxis and Digi. We also believe UMobile did a good job in threating the big telcos position as its data offering together with micro-credit scheme managed to entice entry level subscribers. Margin largely intact. Despite all the price war to provide affordable data package, we strongly believe EBITDA margin largely unaffected despite telcos are dedicating large amount in marketing to stimulate sales. However we foresee, Maxis simple package offering in both prepaid and postpaid segment likely to be the winner in term of cost management. Recommendation. Despite the headwinds in GST implementation, we maintain our Overweight call on telecommunication sector. We note that valuation offer by telcos are not cheap, however in view of solid dividend payment in current negative environment may offset the lofty valuation. Attractions on the sector include 1) attractive dividend stream 2) strong broadband initiatives and take up rate and 3) steady postpaid and prepaid net addition. Digi is our top pick with a TP of RM5.90 pegged at its last 3-year average EV/EBITDA of 14.6x, 2

3 Table 1: Peers Comparison Company FYE Div Price EPS (RM) P/E (x) P/B (x) ROE Yield (RM) (%) FY16 FY17 FY16 FY17 FY16 FY17 (%) TP Call Axiata Dec Hold Maxis Dec Hold Digi Dec Buy Telekom Dec Hold Time DotCom Dec NR NR Average Source: Bloomberg, M&A Securities Table 2: Subscribers Overview (4Q15) Million Total Postpaid Prepaid Broadband Subs Subs % of Subs Subs % of Subs Subs % of Subs Celcom 12,250 2,830 23% 9,447 77% na na Maxis 11,579 2,765 24% 8,520 74% 294 2% Digi 12,125 1,840 15% 10,285 85% na na Total Streamyx Unifi Fixed Line Subs Subs % of Subs Subs % of Subs Subs % of Subs Telekom 5,742 1,501 26% % 3,402 59% Source: Company: M&A Securities Table 3: Capex Guidance (Million) FY15 Guidance FY15 Spent FY16 Capex Axiata RM4.5-RM4.9 bil RM4.9 bil RM5.7 bil Maxis RM1.14 bil RM1.30 bil RM1.2 bil Digi RM750 mil RM904 RM900 mil Telekom 18% of revenue RM946 mil 20% of revenue Source: Company: M&A Securities 3

4 Figure 1: Postpaid plan comparison Digi Postpaid 28 U Mobile U28 Celcom First Blue Digi Postpaid 48 U Mobile (P50) Digi Postpaid 68 U Mobile Hero 70 Celcom First Gold Digi Postpaid 98 MaxisONE Plan 98 Monthly Subscription RM28 RM28 RM45 RM48 RM50 RM68 RM70 RM80 RM98/RM78 RM98 Bundled Data 1GB/500MB 3GB 2GB+2GB 5GB+5GB 3GB/1GB 5GB 6GB/3GB 7GB(+8GB) (Weekend) (weekend) 10GB/7GB 5GB Carry forward unused data 500MB/250MB No 2GB 1GB/500MB No 2GB/1GB No 5GB 4GB/2GB No Bundled Calls min 50 min 100 min 50 min Unlimited Unlimited Unlimited 100 Bundled SMS 50/Unlimited (UMobile) min 100/Unlimited (Others - Unlimited 300/Unlimited Unlimited 18 sen (UMobile) Call Rate 20 sen 20 sen (per minute) (Other 20 sen 15 sen 10 sen 15 sen/0 sen sen/0 sen - 3 sen (UMobile 3 sen (UMobile 3 sen (UMobile SMS Rate 15 sen 8sen 20 sen 10 sen 8 sen (Other 8 sen (Other 10 sen Network) - 10 sen - (Other Source: Company Website 4

5 M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities Sdn Bhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, Kuala Lumpur Tel: Fax: Website: 5