Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) and fair value of RM3.30/share, based on an FY19F EV/EBITDA of 5.5x. This is 3SDs below its 3-year average of 8x given the intensifying broadband competition and implementation of the Mandatory Standard on Access Pricing (MSAP), which has reduced wholesale prices for third-party operators to access TM’s high-speed broadband network.

• TM’s dominant position in the fixed broadband market is beginning to be encroached with Tenaga Nasional’s pilot project in Jasin, Melaka to assess the technical, safety and commercial viability of using its electrical infrastructure for the government’s National Connectivity Plan, as reported by The Star today.

• This project, aimed at providing faster, cheaper and wider internet connectivity, would involve 1,100 homes in Taman Merbau, Taman Maju and Felda Kemendor.

• Tenaga currently has an extensive fibre optic network of over 12,000km and as the sole distributor for electricity in the country, has access to every home in Malaysia, enabling the company to deploy parallel high-speed broadband capability over its power infrastructure.

• Recall that in July, TM and Tenaga Nasional had aborted a memorandum of understanding (MoU) signed back in January this year to jointly develop an implementation plan to deliver on the government’s Nationwide Fiberisation Plan (NFP).

• That collaboration was envisioned to capitalise on the combined strength of both company’s nationwide infrastructure and proven expertise, capitalising on synergies to develop the most efficient cost structure, which could have accelerated the fibre broadband network reach. This involved tapping into the sharing of resources such as existing fibre network, control centres, other transmission systems and building facilities of both companies.

• With the implementation of the MSAP regime which has reduced domestic wholesale prices for all fibre optic networks since the beginning of the year, it is uncertain at this stage whether the fibre optic venture can be financially viable for Tenaga in areas of low population density.

• Even with the abortion of the earlier MoU, we believe that Tenaga’s plan would be collaborative with TM as its resources could facilitate in its fibre rollout. As Tenaga is likely to invest in areas or segments where TM’s fibre network is currently unavailable, we do not expect direct competition between the two operators in the medium term. Hence, we do not expect any near-term impact from this development.

• The stock currently trades at a depressed FY18F EV/EBITDA of 5x, well below its 3-year average of 8x due to the rising tide of competition and government-mandated wholesale price cuts.

Source: AmInvest Research - 7 Sept 2018