Enough room for all telcos

KUALA LUMPUR: The local mobile telecommunication scene is very much profitable, say analysts, with each player still having enough room to make money although competition has heated up.

The analysts note that there is a growing trend for companies, especially the big three telcos DiGi.com Bhd, Maxis Bhd and Axiata Group Bhd to target opportunities from the influx of migrant workers into Malaysia, particularly from Indonesia, Myanmar and Bangladesh.

CIMB Research telco analyst Kelvin Goh said in a report that competition had risen a notch, with Maxis introducing a prepaid plan called Bagus, which mainly reduced long-distance voice telephony rates and overseas short-messaging service rates.

“Maxis' own revenues are likely to be cannibalised, given that Bagus' rates are lower than the existing ones. However, it hopes to make up for this by gaining market share,” added Goh, who had a “neutral” call with a target price of RM5.70 on Maxis.

It is understood that DiGi's management had taken note of this new Maxis initiative and is prepared to respond by adjusting its pricing plans.

“DiGi reckons (the) effective rates may not be that attractive due to terms and conditions attached. In mitigation, DiGi is prepared to respond by tweaking its own pricing plans as well as improving contact and incentives with dealers,” RHB Research analyst Lim Tee Yang said in his report.

RHB Research, which had an “outperform” call on DiGi.com with a target price of RM4.40 (based on the discounted cashflow model), did not discount a potential price war in this migrant worker segment but noted that price undercutting in the market was unsustainable for long periods of time.

“Despite concerns on competition, management maintained 2012 guidance of mid-to-high single-digit revenue growth and stable EBITDA (earnings before interest, tax, depreciation and amortisation) margins. In addition, DiGi is on track to complete is network modernisation by year-end,” Lim said in the report.

Lim did not change his earnings forecasts for DiGi's financial year 2012, expecting a net profit of RM1.3bil on the back of revenue at RM6.5bil and earnings per share of 16.9 sen.

Despite the competitiveness of the industry, Lim said tax credits and cost savings (both from operations and network collaboration with Celcom) should help sustain earnings growth for DiGi.com.

A senior telecommunications analyst with a foreign research brokerage said competition was always good for both the consumer and the companies, but noted that “from a historical point of view, it is the strong ones that will endure in the end”.

Meanwhile, Hong Leong Investment Bank chief of research Low Yee Huap said in his report that DiGi would stand to benefit the most, followed by Maxis and Celcom (a subsidiary of Axiata group) should the Government finally allowed a pass-through of the 6% service tax on prepaid charges.

Low expects an earnings uplift of 6% for DiGi, 4% for Maxis and 2% for Celcom if competition and usage remain status quo but added that there might be a risk of lower usage from prepaid subscribers because of the price-sensitive nature of this market segment.