In the second quarter of CY24, the telecommunications sector showed mixed results, with fixed and mobile operators generally meeting or exceeding expectations, although a telco tower operator fell short due to slower network rollouts. Coverage-wise, 20% of stocks surpassed projections, 60% met them, and 20% missed, compared to a previous 100% meeting expectations three months prior.
Despite some variances, the sector's core net profit for the first half of CY24 increased by 22% year-on-year, mainly driven by Axiata (OP; TP: RM2.75), which saw substantial gains from its high-growth markets. Other domestic players faced a competitive landscape, impacting their performance in both mature and emerging markets.
The report highlights a mixed performance across different segments. For mobile services, average revenue per user (ARPU) trends were varied: postpaid services saw sustained net additions but faced ARPU erosion, prepaid services experienced uneven net additions with stabilising ARPUs, and home fibre services had healthy net additions but weaker ARPUs, except for Maxis. The weaker home fibre ARPU for CDB (OP; TP: RM5.59) and Telekom Malaysia was noted, with no changes to the forecasts for these companies.
Axiata's strong performance was attributed to its ARPU strength and cost discipline at XL and Smart, which significantly boosted the sector's earnings. CDB also contributed positively due to reduced depreciation and lower taxes, offsetting the profit drag from Telekom Malaysia, which had benefited from tax credits in the previous half-year. The overall growth in Axiata's emerging markets was crucial for the sector's positive performance.
Prepaid ARPUs stabilised in 2QCY24, with slight improvements observed for Digi and Celcom, while Maxis' ARPU remained stable. However, postpaid ARPUs continued their downward trend due to strategies encouraging migration from prepaid to postpaid plans. The net additions in the prepaid segment varied, with Maxis showing strong performance while Digi faced increased attrition. The major mobile network operators (MNOs) also experienced healthy sequential postpaid net additions, aligning with their strategies to shift users from prepaid to postpaid plans.
In the fixed-line market, Unifi's ARPU weakened due to discounts and an increased number of new subscribers on entry-level packages. However, the overall subscriber net additions showed a positive trend across players, including Maxis and CDB. The increasing competition in the home fibre segment has led to aggressive marketing strategies, including discounts, to attract subscribers.
Kenanga Stock Broking House maintains an OVERWEIGHT recommendation for the sector, anticipating that the forthcoming 5G Dual Network policy announcement will alleviate uncertainties surrounding earnings, capex, and dividends. The expected policy will be crucial in improving stock valuations and sentiment for MNOs, which have declined by 30% from February 2021 levels. Fixed-line players are also set to benefit from the growth in data centres and digital infrastructure, driving increased demand for bandwidth services.
Top picks in the sector remain Telekom Malaysia and CDB. Telekom Malaysia is favoured for its role in data growth driven by digital transformation and its involvement in JENDELA phase 2 projects. CDB is highlighted for its net merger synergies and strong free cash flow yield, supporting its capacity for steady dividends and economies of scale.
