Review

In 1QCY24, all the stocks under our telecommunications universe reported results that aligned with our expectations except for CELCOMDIGI.

CELCOMDIGI reported results that were below expectations due to higher operating expenses as well as the expenses incurred from the voluntary separation scheme. We tweaked the TP higher to RM4.64 from RM4.60 after revising the earnings forecasts and rolling forward our valuation base year to CY25. We upgrade the call from Hold to Buy.

On the other hand, three companies, AXIATA, MAXIS and TM, reported earnings within expectations. For AXIATA, it recorded a higher revenue (+13.3% YoY) and EBITDA (+25.4% YoY) of RM5,662mn and RM2,737mn, respectively. The stronger earnings performance was mainly driven by XL and Robi as a result of higher ARPU and cost optimisation, as well as better earnings performance from Edotco.

MAXIS also reported a decent performance in 1QCY24, as the group saw its revenue and EBITDA jump 13.3% YoY and 25.4% YoY to RM5,662mn and RM2,737mn, respectively. The revenue growth was backed by higher consumer and enterprise businesses, while the stronger EBITDA was mainly attributed to higher revenue and stricter cost management.

Meanwhile, TM also reported a decent performance in 1QCY24, as the group’s revenue and EBITDA increased by 1.8% YoY and 4.1% YoY to RM2,837mn and RM1,189mn respectively. The higher revenue was contributed by TM Global, while the stronger EBITDA was driven by lower operating costs.

In general, the total service revenue of all the mobile incumbents (Celcom, Digi, Maxis) remains resilient. This was mainly supported by both the consumer and enterprise businesses of MAXIS.

Outlook

Moving forward, we foresee Cellcos to continue facing a competitive operating environment, given the country's mature mobile space. Meanwhile, the near-term operating landscape is also expected to be influenced by the 5G rollout strategy developments, particularly on the mechanics of the transition from Single Wholesale Network to Dual Wholesale Network. More details on the transition plan will be unveiled soon.

Recommendation

In all, we maintain a neutral stance in the telecommunications sector. Within our universe, we have a Buy recommendation on CELCOMDIGI (TP: RM4.64). Meanwhile, we take this opportunity to raise the terminal growth rate of TM from 1.0% to 1.5%, given the group is expected to benefit from the data centre boom over a longer term. Consequently, we tweaked the TP higher from RM6.65 to RM7.18 based on DCF valuation with a WACC of 8.5% and LT growth rate of 1.5%. Upgrade TM from Hold to Buy. On the other hand, we maintain Sell recommendations on MAXIS (TP: RM3.70) and AXIATA (TP: RM2.61).

Source: TA Research - 5 Jun 2024