• Out of the five companies under our coverage three met our expectations, one exceeded them and one fell below.

• Inflationary pressures and market saturation are expected to limit ARPU growth in Malaysia's mature mobile market while prepaid ARPU improvement remains minimal due to current telco players’ strategies.

• 5G monetization in Malaysia remains slow, hindered by coverage gaps and adoption challenges, with enterprise opportunities expected to take longer to materialize despite steady gains in core connectivity and ICT solutions by telco players.

• We downgrade our sector call to NEUTRAL from OVERWEIGHT due to limited potential for ARPU growth, slower-than-expected 5G monetization, uncertainties surrounding the finalized structure of the 5G dual network model and a lack of catalysts within the industry.

• Our top picks are: (i) TM (BUY, TP: RM7.78), as the primary beneficiary of providing services to both public and private sectors, and (ii) TIME (BUY, TP: RM6.09), supported by a positive long-term business outlook and strong demand for data and data centres.

Decent Revenue, Mixed Profits

The recent corporate earnings season for telco players showed mixed results, one company exceeded expectations, one fell below and three met expectations. TM's 9MFY24 net profit of RM1,286mn (-10.5% YoY) exceeded expectations due to lower-than-expected depreciation and amortization, while CelcomDigi's RM1.3bn core net profit fell short, mainly due to higher-than-estimated depreciation charges. More importantly, all five companies under our coverage reported higher revenue growth, driven by improved service revenue and increased data demand. However, at the bottom line, CelcomDigi and TM posted lower earnings. CelcomDigi experienced a slight revenue dip and a 6.2% increase in total costs, mainly due to higher integration expenses and increased spending to support traffic growth. TM’s earnings contracted by 10.5%, as 9MFY23 benefited from the recognition of tax credits from unutilized tax losses. For 9MFY24, the sector's top-line growth was 6.0% YoY, while bottom-line growth was more modest at 2.1% YoY.

ARPU Growth Limited Amid Inflation and Market Saturation

Looking ahead, we expect inflationary pressures to impact ARPU, as consumers reduce spending and opt for more basic data services. While high-value postpaid plans could support ARPU growth, the contribution is likely to remain limited due to the maturity and saturation of Malaysia's mobile market, which boasts a penetration rate of nearly 150%. In the prepaid segment, we foresee minimal ARPU improvement in the near term, given current telco strategies. For instance, Maxis’s prepaid ARPU declined to RM36.9 in 3QFY24 from RM38.1 in 3QFY23, as its broader pricing strategy aimed at capturing a wider market led to some dilution. Similarly, CelcomDigi’s prepaid ARPU was flat, while revenue declined 2.9% YoY for 9MFY24, attributed to dual-SIM consolidation and a strategic shift to reduce reliance on rotational SIM segments. Prepaid demand is also expected to remain subdued, partly due to a slow recovery in roaming contributions. Limited growth is anticipated from migrant workers and tourists. While Malaysia welcomed 18.38mn international tourists between January and September this year, representing a 27% YoY increase, the figure remains a third below the full-year target and 8.6% lower than the same period in 2019, according to Tourism Malaysia

Slow Progress in 5G Monetization

We foresee slower-than-expected 5G monetization, with 5G coverage and higher adoption playing critical roles in achieving meaningful returns. According to Opensignal, Malaysia currently ranks fourth in 5G availability within APAC, behind India, Singapore, and South Korea. One key factor influencing 5G availability across the region is the allocation of spectrum bands for 5G services. In terms of 5G coverage, which measures the extent of geographic coverage in populated areas, Singapore leads with nearuniversal 5G access. South Korea, Taiwan, Hong Kong, and Australia also show high coverage levels, while Malaysia follows with a notable gap compared to these leaders. The challenges in monetizing 5G are deeper. The government’s approach of avoiding additional charges aims to optimize service usage and improve the standard of living, which shifts the focus of 5G monetization to the enterprise segment. However, we believe it will take longer to fully capitalize on enterprise 5G opportunities at the current pace. CelcomDigi’s Enterprise Business has shown steady performance in core connectivity, with an increase in high-quality subscribers and promising growth in ICT solutions. Similarly, Maxis reported a 7.0% growth in enterprise business revenue, primarily driven by 2G and 4G wholesale arrangements and increased corporate mobile subscriptions. However, these gains have yet to reflect significant contributions from 5G services.

Downgrade to NEUTRAL Call on Telco

All in all, we downgrade our call to NEUTRAL from OVERWEIGHT due to limited potential for ARPU growth, slower-than-expected 5G monetization, uncertainties surrounding the finalized structure of the 5G dual network model and a lack of catalysts within the industry. Our top picks are: (i) TM (BUY, TP: RM7.78), as the primary beneficiary of providing services to both public and private sectors, and (ii) TIME (BUY, TP: RM6.09), supported by a positive long-term business outlook and strong demand for data and data centres.

Source: BIMB Securities Research - 3 Dec 2024