Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) 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.

• TM has cut the price of its Streamyx 8Mbps plan by 44%-57% to RM69/month for existing Streamyx customers and RM89/month for new customers from RM160/month currently. For comparison, the existing plans for Streamyx 1Mbps cost RM110/month, 2Mbps at RM130/month and 4Mbps at RM140/month.

• The announcement was made following calls by the Communications and Multimedia Minister Gobind Singh Deo to resolve issues faced by Streamyx customers, especially on the lack of high-speed internet connectivity as well as the high cost of their monthly subscription plan.

• TM completed its internet upgrade programme in April 2019 with 973,000 unifi customers upgraded to 10x the existing speed; 266,000 Streamyx customers in unifi coverage areas upgraded to unifi and 226,000 Streamyx customers in non-unifi coverage areas upgraded to 2 times the existing speed where technology permits.

• TM will be addressing copper network challenges via fibre, wireless and GigaWire in a network rollout which involves a phased customer migration starting today until 2021. Some 70% of the remaining 934,000 Streamyx customers will be able to enjoy unifi services by end-2020.

• 1QFY19 Streamyx users shrank by 7% QoQ and 23% YoY to 872K while recruitment rates for new unifi customers rose by 2% QoQ and 12% YoY to 1.3mil. Based on 1QFY19 Streamyx ARPU of RM87/month, we estimate that the reduction of Streamyx ARPU by 21% to RM69/month could cut FY19F earnings by 7% and FY20F by 15% under a worst-case scenario.

• However, we expect the full impact of the migration to lower priced Streamyx packages to be partly offset by users opting for higher priced but faster unifi packages. In 1QFY19, unifi ARPU averaged RM179/month in which most of its customers have already been upgraded to the faster speed.

• The basic entry unifi package at RM79/month offers 30Mbps which has to be topped with another RM20/month for call options. The next best unifi option is priced at RM129/month which offers 100Mbps that will need an extra RM30/month for bundling with TV options.

• Nevertheless, FY19F revenue outlook remains challenging with unifi’s ongoing ARPU pressure, partly alleviated by most of the customers opting for faster speed packages.

• 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 3%.

Source: AmInvest Research - 29 Jul 2019