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Author: PublicInvest   |   Latest post: Thu, 25 Apr 2019, 10:18 AM

 

Telekom Malaysia - Less Compelling Upside

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2018 has been a challenging year for Telekom Malaysia (TM), with headline net profit falling by over 80% (core earnings was down 27%) following the implementation of MSAP which resulted in lower revenue and margin as well as higher impairments. For 2019, we see an easing of regulatory pressures though the dust may not have settled as we have yet to witness the full impact from the cut in wholesale prices as customers could still switch to cheaper packages. We expect a more significant impact on the retail segment with Unifi ARPU falling by 15% while there may still be further provisions in the wholesale segment, though amount could be smaller than FY18. Meanwhile, we think accelerated depreciation or impairment on out-dated fixed network assets may persist in FY19F. Since our upgrade on 27 November 2018, TM’s share price has risen by 38%. Given a less compelling upside to our DCF based TP of RM3.60, we cut our rating to from Trading Buy to Neutral.

  • Further provision in FY19? In FY18, TM recognised a provision of RM169.2m arising from an estimated impact of MSAP. Going forward, we believe there could still be further provision but the amount may be smaller than what was recognised in FY18, which should have taken into account the key services governed under MSAP. As TM is still finalising rates with access seekers, we think there could still be room for further provision on perhaps the unregulated services, though the amount could be lower. Meanwhile, retail segment should also be affected by a more substantial decline in ARPU. We assume a 15% decline in unifi ARPU to RM163 in FY19F, compared to only a 4% drop in FY18. Overall, we estimate FY19F revenue to fall by 7% mainly due to lower data and internet revenue.
  • Sufficient impairment on fixed network assets? In FY18, TM also recognised an impairment of RM982.5m on its fixed and wireless network assets, mainly due to technology obsolescence. Based on our estimate, the book value of TM’s telecommunication networks (as at 31 December 2018) could be around RM10bn. We worked out that accumulated impairment on network assets provided thus far amounted to RM1.2bn, which was recognised in FY16-18. We do not rule out the possibility of further impairment or accelerated depreciation to be made in the future, particularly for its outdated copper cable network where its fair value could have fallen below its recorded cost due to rapid changes in technology.
  • Downside risk to reported net profit. Core earnings will not be affected by provision and impairment as these items are excluded when evaluating the underlying performance of the business. We are keeping our core earnings forecasts unchanged. However, we believe there could be some downside risk in terms of headline profit due to potential impairment on obsolete fixed network assets, which could lead to lower DPS as its guidance of 40-60% payout is based on reported figures.

Source: PublicInvest Research - 12 Mar 2019

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