Benign competition in mobile telecoms

by **Cals** Mon 09 Dec 2013, 10:03

Business & Markets 2013

Written by Maybank IB Research

Monday, 09 December 2013 09:36

Telecommunications sector
Maxis Bhd chief executive officer Morten Lundal outlined his strategy for the company, pledging to stem the market share loss in the prepaid segment and focus on the enterprise segment as a new source of revenue. Importantly, he was cognisant of the need to not compete by pricing.

Thus, competition in the mobile space should remain relatively benign in our view, lowering downside risk.

Nevertheless, sector valuations remain elevated, hence our “neutral” sector call is unchanged.

One of management’s priorities is to halt the market share loss in the prepaid segment. Maxis has been relatively less aggressive in developing distribution channels and in preserving its brand perception.

Management expects to spend more on marketing in 2014 (which would suggest potential margin compression). It also emphasised that Maxis would not compete on pricing, and that data price points need to rise.

It noted that enterprise is a relatively undeveloped segment in Malaysia. Presently, enterprise remains dominated by the fixed line players (Telekom Malaysia Bhd’s [TM] 2012 enterprise revenue came to RM3 billion).

Management believes corporations would eventually migrate from fixed to cellular in order to boost efficiency. Such a trend is already evident in Europe, where Vodafone derives about a third of its revenue from enterprise.

Maxis noted that the fibre business is extremely challenging, given the reliance on TM’s network.

Management is exploring ways to further reshape operations in the near term, and does not rule out shutting down the division if things do not improve. TM could potentially benefit.

The organisational structure has already been flattened in order to reduce bureaucracy and staff cuts have also been completed.

Management will invest more to improve network quality, hence we can expect capital expenditure to trend upwards in 2014. Management also noted that it requires time for its branding initiatives to bear fruit, and warned of further underperformance in the coming quarters.

In our view, investors expecting a quick turnaround may be disappointed. Management expects to maintain a 40 sen dividend per share in 2014, which is within our estimates.

We remain “neutral” on the sector as valuations remain elevated. Our only “buy” in the sector is Time DotCom Bhd (target price [TP]: RM4.40), as it is the one that’s most exposed to the secular growth trends of data, and has capital management potential.

Among the big caps, our relative preference is TM (“hold”, TP: RM5.50) and DiGi.Com Bhd (“hold”, TP: RM4.95), given their year-to-date underperformance and the emergence of potential rerating catalysts in the near term. — Maybank IB Research, Dec 6

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This article first appeared in The Edge Financial Daily, on December 9, 2013.