Cautious second half expected for telecommunication industry

PETALING JAYA: The telecommunication sector is experiencing a more cautious sentiment not only due to macroeconomic headwinds and geopolitical conditions, but more importantly, because of changes within the 5G framework in the country.

In a report, RHB Investment Bank Bhd said read-throughs from the first quarter of financial year 2025 (1Q25) and management suggest a cautious second half with higher 5G wholesale cost.

It noted, however, dividends payout should be steady.

The research house said CelcomDigi Bhd expects greater synergies, with integration-related costs tailing off in financial year 2025 (FY25).

“Further policy adjustments to the 5G framework should not be ruled out with the completion of the share subscription agreement and cost rationalisation at Digital Nasional Bhd (DNB) with the three mobile network operators – CelcomDigi, Maxis and Yes are coughing out a further RM320mil each to acquire DNB’s shareholder loan from the Finance Ministry and equity by the end of 2025,” it said.

According to RHB Investment, Axiata Group Bhd was the worst performer results wise as it was the most pre-disposed to overseas earnings.

In line with that, RHB Investment cut its FY25 to FY27 core earnings.

“Adjustments to Axiata were mainly due to the deconsolidation of XL Axiata as a subsidiary and reclassification as an associate from mid-April,” it said.

It also cut OCK Group Bhd’s FY25 to FY27 core earnings as well.

“But Time Dotcom Bhd (Time) posted the largest gains as investors sought refuge in resilient domestic-centric names following the US retaliatory tariff,” it noted.

The research house added that relative to its Asean peers, there were four local telecommunications companies (telcos) ahead of Indonesian counterparts, but lagged behind Singapore and Thailand where dividend yields were higher.

For the March quarter, some of the key standouts included weaker-than-expected industry mobile revenues, and retail fixed broadband (FBB) average revenue per user (APRU) compression.

“Mobile service revenue momentum was tepid, even after accounting for revenue seasonality, in our view, with industry prepaid ARPU at new lows.

“Retail FBB ads contracted further, alluding to saturation in key market centres,” RHB Investment said.

One positive was Time’s whose FBB revenue continued to outperform peers, supported by progressive expansion of its fibre footprint and good inroads made into single-dwelling units – a Telekom Malaysia Bhd (TM) stronghold.

“Broadly, telcos remained steadfast on cost excellence, which is a narrative that will continue in the current environment,” the research house noted.

Meanwhile, the research house said its top picks for the sector were TM, CelcomDigi and Axiata.

It noted that it will remain “neutral” over the sector but prefers the fixed line plays over mobile, due to structural catalysts and resilient earnings.

“Competition, weaker-than expected earnings and adverse regulatory developments remain key risks for the sector and stocks.”