Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with a higher DCF-based fair value of RM2.76/share (from an earlier RM2.17/share), assuming the sale of VADS, WACC of 8.6% and zero terminal growth rate.

• We expect a significant boost to TM’s valuation from the potential sale of its wholly-owned VADS, as reported by The Edge Malaysia. The report indicated that several buyers have been shortlisted, while Deloitte Singapore could be managing the sale.

• Delisted from Bursa Malaysia in 2009, VADS is a fully Integrated connectivity/ICT/business process outsourcing solutions provider which provides end-to-end solution and managed services to enterprise and public sector customers.

• VADS’ main activities are managed networks services, contact centre services (which has now evolved to business process outsourcing) and systems integration services.

• VADS started operations in 1992 as a joint venture between TM and IBM Malaysia Sdn Bhd as part of their strategy to spearhead the convergence of the IT and telecommunications industry.

• Based on VADS’ FY17 net profit of RM251mil, we estimate that a sale could generate proceeds of RM5bil, assuming an acquisitive PE of 20x – in line with current telco valuations as well as India-based ICT and outsourcing businesses such as Infosys and Tata Consultancy Services. This could drastically cut TM’s FY18F net debt by 69% from RM7.2bil to RM2.2bil – slashing net debt/EBITDA from 2.1x to 0.7x.

• Based on an FY17 net book value of RM291mil, this could generate an exceptional disposal gain of RM4.7bil – 8x TM’s FY19F earnings.

• While the VADS sale offers a one-off revaluation boost, TM’s longer term earnings prospects remain depressed given the impact of declining broadband average revenue per user (ARPU) in line with the government’s “double speed at half the price” policy.

• Unifi’s 3QFY18 ARPU of RM193 is unrealistic compared with the almost 40% price cut in 30Mbps plan, which was announced in early July and gradually implemented towards the end of 2018. As such, we expect customers’ gradual migration towards the more affordable government-mandated plans to substantively cut TM’s FY19F earnings.

• The stock currently trades at a depressed FY19F EV/EBITDA of 5x, well below its 3-year average of 8x due to the rising tide of competition and government-mandated price cuts. With the exit of TM from the FBMKLCI in December last year and now unexciting dividend yields of 3%, we expect investor sentiments to remain weak.

Source: AmInvest Research - 22 Jan 2019