Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) but with a higher DCF-based fair value of RM2.95/share (from an earlier RM2.76/share), based on a WACC of 8.6% and zero terminal growth rate.

• We raise our FY19F–FY20F earnings forecasts by 8%–11% as TM’s FY18 normalised net profit of RM632mil came in above expectations, 6%–7% above our and consensus estimates.

• The group declared a dividend of 2 sen, which translates to a payout rate of 49% and was above our zero assumption for FY18. However, we maintain our FY19F–FY20F DPS with management maintaining its payout policy to 40%–60% of reported profit after tax and minorities (PATAMI).

• As Communications and Multimedia Minister Gobind Singh Deo has recently indicated that high-speed broadband prices will not be cut this year, TM earnings prospects have stabilised for now with around 90% of TM’s streamyx and unifi existing customers having been upgraded to faster speed packages while experiencing minimal downtrading activities together with manageable revenue declines in FY18.

• While TM’s FY19F revenue growth guidance of low to midsingle digit decline is line with our assumptions, management’s higher-than-FY18 EBIT outlook will drive its bottom line expansion given that capex declined by 22% YoY to RM2.1bil – 18% of revenue vs 23% in FY17.

• Excluding impairments for TM’s legacy copper-based and WiMax network infrastructure, the group’s FY18 core net profit fell 27% YoY due to decline in voice (-5%) and data (-9%), impacted by 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 further exacerbated by a 37% rise in depreciation and 16% increase in interest cost.

• TM’s 4QFY18 normalised net profit slid 61% QoQ to RM105mil despite a revenue increase of 5% driven by higher voice, data and sales of Indefeasible Right of Use for submarine connectivity. The lower 4QFY18 bottom line stemmed from higher operational costs as direct expenses rose 20%, supplies & materials 38% and maintenance & other operating costs 11%, together with a high tax rate at 89% (adjusted for impairments and webe loss) vs a minor positive charge in 3QFY18.

• Unifi’s 4QFY18 average revenue per user (ARPU) fell by RM9/month QoQ and RM13/month YoY to RM184/month. However, recruitment rates for new unifi customers continue to grow, up 3% QoQ and 15% YoY to 1.3mil, while Streamyx shrank by 9% QoQ and 23% YoY to 936K due to migration to unifi and other fixed and wireless broadband providers.

• While the stock currently trades at a FY19F EV/EBITDA of 5x, it is well below its 3-year average of 7x as dividend yields are unappealing at 2% for a non-FBM KLCI component stock.

Source: AmInvest Research - 27 Feb 2019