Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM2.17/share, based on a WACC of 8.6% and zero terminal growth rate.

• Our FY18F-FY20F earnings forecasts are mostly unchanged even though TM’s 9MFY18 normalised net profit of RM528mil appears to be above expectations, as we expect the impact from lower unifi price packages to materialise in 4QFY18.

• However, we have removed FY18F DPS and halved FY19FFY20F dividends vs. our earlier payout assumption of 100% as management has revised its policy to 40%-60% of reported profit after tax and minorities (PATAMI) from an earlier unofficial minimum of RM700mil.

• We note that Unifi’s 3QFY18 average revenue per user (ARPU) rose RM2/month QoQ to RM193, which is unrealistic compared to the almost 40% price cut in 30Mbps plan, which was announced in early July and expected to be gradually implemented towards the end of this year. As such, we expect customers’ gradual migration towards the more affordable government-mandated plans to substantively cut TM’s immediate earnings.

• Hence, TM’s 9MFY18 core net profit accounted for 89% of our FY18F earnings and 87% of street’s, which is significantly higher compared to 68%-74% for the comparative periods over the past 3 years.

• In 3QFY18, TM has provided for RM995mil in impairment provisions for TM’s legacy copper-based and WiMax network infrastructure. Excluding these impairments, TM’s 3QFY18 normalised net profit surged 71% QoQ to RM266mil, largely due to lower operational costs as direct expenses fell 14%, doubtful debts 25%, marketing expenses 40% and maintenance 12%.

• On a YoY comparison, TM’s normalised 9MFY18 net profit dropped 18% in tandem with the 2% revenue decline, mainly due to the implementation of the Mandatory Standard on Access Pricing (MSAP), which has reduced wholesale prices since the beginning of the year for third-party operators to access TM’s high-speed broadband network. This was partly supported by lower operating costs and depreciation from the group’s efficiency rationalisation initiatives.

• Recruitment rates for new unifi customers continue to grow, rising 3% QoQ and 21% YoY to 1.3mil, which we understand largely occurred towards the end of 3QFY18. However, Streamyx shrank by 4% QoQ and 20% YoY to 1mil due to migration to unifi as well as other fixed and wireless broadband providers.

• The stock currently trades at a depressed FY18F EV/EBITDA of 4x, well below its 3-year average of 8x due to the rising tide of competition and government-mandated price cuts. With the expected exit of TM from the FBM KLCI in December this year and now unexciting dividend yields, we expect investor sentiments to remain weak.

Source: AmInvest Research - 27 Nov 2018