KUALA LUMPUR (March 10): Apex Securities expects Malaysian telecommunication companies (telcos) to face lower profitability this year, due to high network upgrade costs, as they increase infrastructure investment with greater clarity on the 5G operating environment.

In addition, the research house said in a note it believes stagnant average-revenue-per-user (ARPU) growth, coupled with fading optimism over the data centre boom, could lead to a de-rating in valuations.

Year-on-year (y-o-y), 5G adoption surged by 119.9% to 18.2 million subscribers in calendar year 2024 (CY2024), while 4G subscriptions declined by 28.1% y-o-y, reflecting a significant shift in consumer preference.

Telecommunications providers are accelerating adoption by offering competitive pricing, bundling 5G with postpaid plans, and providing free upgrades, while the increasing availability of affordable 5G smartphones further supports migration.

Most mobile network operators under Apex Securities’ coverage have guided tepid earnings before interest and tax growth for financial year 2025 (FY2025), citing cost structure as a key reason.

ARPU is expected to slide downwards this year, with increased market competition and aggressive pricing strategies.

Apex Securities has downgraded its recommendation on the sector to 'neutral'.

Among the five companies it covers, Maxis Bhd (KL:MAXIS) and CelcomDigi Bhd (KL:CDB) met its expectations in CY2024, while Axiata Group Bhd (KL:AXIATA) and Telekom Malaysia Bhd (KL:TM) outperformed due to better-than-expected operating expenditure.

In contrast, REDtone Digital Bhd (KL:REDTONE) fell short, impacted by lower revenue from managed telco network services, due to slower project deliveries.

That said, REDtone is the research house's top pick for this year, due to its potential to benefit from Jendela 2's broadband expansion, and a potential partnership with second 5G network provider U Mobile Sdn Bhd to drive growth.

Jendela 2 is the second phase of the government’s expansion and improvement of the country's broadband infrastructure.

REDtone was appointed as a universal service provider for the Jendela Phase 1 (Part 2) project.

Apex Securities expects the Jendela Phase 2 tender process to start by end-2025, after identifying tower locations and assessing suitable technologies for implementation.

“Furthermore, we also note that contractor performance in Phase 1 will play a crucial role in vendor selection, ensuring that only experienced and reliable contractors are appointed. This is expected to narrow down competition, favouring players with a strong track record in government projects.

Other telcos on Apex Securities’ radar is TM, favoured as a key asset owner, given its critical role in providing connectivity.

Both 5G network operators, DNB and U Mobile will need to rely on TM’s fibre infrastructure in the near term to ensure seamless 5G service delivery.

Axiata is also seen as a compelling value play, currently trading at 4.4 times forward enterprise value/earnings before interest tax, depreciation and amortisation (-1 standard), with strong potential to unlock synergies from the upcoming XL Axiata and Smartfren merger.

For Maxis and CelcomDigi, it expects operating expenditure to remain elevated, in line with FY2024, due to higher capital expenditure spending.

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