Investment Highlights

• We raise our call on Telekom Malaysia (TM) to BUY from HOLD with a higher DCF-based fair value of RM4.08/share (from an earlier RM2.95/share), based on a WACC of 7.3% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 5x.

• We raise our FY19F–FY21F earnings forecasts by 41%-42% on significant operating cost reduction assumptions as TM’s 1QFY19 normalised net profit of RM296mil exceeded expectations, accounted for 47% of our earlier FY19F earnings and 49% of consensus.

• The outperformance stemmed from a surprisingly sharp drop in operating costs, brought about by the group’s transformative Performance Improvement Programme (PIP). This ongoing initiative under acting CEO Imri Mokhtar has been carried out since mid-2018 and has led to cost optimisation in Unifi mobile’s domestic roaming, contract renegotiation, marketing, business procurement and manpower.

• Management highlighted that there was no significant 1QFY19 write-backs for cost provisions incurred last year notwithstanding likely seasonally higher cost expenditures towards 2HFY19. Also, the group’s 1QFY19 capex, which halved YoY to RM151mil, accounted for only 5.4% of revenue vs. management’s guidance of 18%.

• The group did not declare any interim dividend payment, as expected. However, given the raised earnings expectations and that FY19F capex guidance of 18% to sales is lower than our assumption of 20%, we have increased our FY19F–FY21F DPS from 7 sen to 15–17 sen, based on a payout ratio of 80%.

• 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 with TM’s Streamyx and Unifi existing customers having been completely upgraded to faster speed packages while experiencing minimal downtrading activities.

• Including MFRS 16 lease adjustments, TM’s 1QFY19 normalised net profit soared 2.8x QoQ mainly due to sharp cuts in operating costs of RM469mil (-20% QoQ) with direct cost decreasing by 32%, other opex 30%, depreciation 16% and materials 44%. On a YoY comparison, 1QFY19 net profit also surged 2.8x with operating costs falling by RM374mil (-14%), supported by declines in direct cost (-18%), other opex (-26%), materials (-63%) and manpower (-6%).

• Revenue remains under pressure, falling by 10% QoQ and 2% YoY due to declines in voice and internet segments. Unifi’s 1QFY19 average revenue per user (ARPU) fell by RM5/month QoQ and RM15/month YoY to RM179/month. However, recruitment rates for new Unifi customers continue to grow, up 2% QoQ and 12% YoY to 1.3mil, while Streamyx shrank by 7% QoQ and 23% YoY to 872K due to migration to Unifi and other fixed and wireless broadband providers.

Source: AmInvest Research - 30 May 2019