Investment Highlights

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

• The share price has surged by 50% to near our fair value since our upgrade on 30 May this year following TM’s strong 1QFY19 results outperformance, which was driven by a surprisingly sharp 18% YoY drop in operating costs.

• Recall that this was supported by the group’s transformative Performance Improvement Programme, an ongoing initiative that was carried out since mid-2018 that has led to cost optimisation in contract renegotiation, marketing, business procurement, manpower and unifi mobile’s domestic roaming operations.

• While management indicated no significant 1QFY19 writebacks for cost provisions incurred last year, we remain wary of seasonally higher cost expenditures towards 2HFY19. We highlight that the group’s 1QFY19 capex, which halved YoY to RM151mil, accounted for only 5.4% of revenue vs. management’s FY19F guidance of 18%.

• In our view, the agenda to implement cost efficiency initiatives remain the key the TM’s prospective earnings recovery given that the decline in Streamyx customers has more than offset unifi increases consecutively since 2QFY17.

• 1QFY19 Streamyx users shrank by 7% QoQ and 23% YoY to 872K while recruitment rates for new unifi customers rose by only 2% QoQ and 12% YoY to 1.3mil. Hence, FY19F revenue outlook remains flattish with the decline in unifi’s average revenue per user expected the taper off due to most of the customers opting for faster speed packages.

• Meanwhile, the recent appointment of Datuk Noor Kamarul Anuar Nuruddin as TM’s new managing director/group chief executive officer provides some reassurance to policy continuity as Imri Mokhhtar, the former acting CEO, resumes his previous role as the chief operating officer.

• However, we are cautious on the new strategic direction which Kamarul could be embarking on following TM’s impressive cost cutting performance in 1QFY19 albeit briefly under Imri’s management.

• Kamarul was formerly Celcom’s chief technology officer responsible for its network strategic plan, later chief information technology and transformation officer, and then chief carrier collaboration officer managing collaborations with domestic network facilities providers, telcos and celcos, foreign cellular operators, as well as international carriers for roaming and traffic services.

• The stock currently trades at a fair FY19F EV/EBITDA of 6x, slightly below its 3-year average of 6.9x, while offering a decent dividend yield of 4%.

Source: AmInvest Research - 25 Jun 2019