Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with a lower fair value of RM2.17 (from an earlier RM3.30/share), based DCF with an unchanged WACC of 8.6% but with terminal growth rate lowered from 2.5% to nil.

• This stems from the group’s clouded longer term prospects, 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.

• The Star reported today that MYTV Broadcasting services could be suspended in several states over non-payment of over RM60mil (10% of TM’s FY18F earnings) outstanding bills to TM.

• Recall that MYTV was selected back in 2014 to spearhead the national digital terrestrial television switch-off from analogue to digital broadcasting. MYTV’s myFreeview service was launched last year, which is accessible via a decoder.

• From 11 Oct to 25 Oct, 20 broadcasting sites have been shut down in Sabah, Sarawak, Kelantan, Terengganu, Pahang, Negri Sembilan, Melaka and Perak, while another 14 could be shut down on 6 November. This will affect RTM1, RTM2, TV3, NTV7, 8TV, AlHijrah and TV9 stations.

• MYTV has spent RM400mil for 34 sites currently which serve 92.7% of the population, while the expansion of those sites to 60 will reach a coverage of 98%.

• Last year, MYTV signed an agreement with TM to pay RM915mil over 15 years which include annual payments of RM61mil after 60 sites are operational. Since the full 60 sites are not operational, MYTV has only paid RM33mil for services rendered to TM in 2016-2017.

• Communications and Multimedia Minister Gobind Singh Deo has indicated that the analogue switch-off to digital is still targeted in 1Q2019 as the reallocation of the 700MW spectrum to cellular operators remains on track.

• We understand that there is speculation that TM may be requested to take over MYTV to enable the switchover as planned.

• We view such a potential development negatively, as the taking over of MYTV will easily require additional capex of RM300mil for the remaining sites to be built over Malaysia. Additionally, MYTV’s outstanding bills may also lead to substantive receivable write-offs to TM’s bottom line.

• 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. With the expected exit of TM from the FBMKLCI in December this year, we expect sentiments to remain weak for the stock.

Source: AmInvest Research - 2 Nov 2018