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 introduced Unifi Air, a wireless solution deploying the 2.3GHz band which is commonly used by WiMax operators. However, it is based on the Time Division Duplex (TDD) vs WiMax’s Frequency Division Duplex system, which requires 2x the frequency band as it uses 2 separate blocks to transmit and receive.

• TDD uses a single frequency band to both transmit and receive by assigning alternating time slots to transmit and receive operations.

• This Unifi Air service, which will be offered to only Streamyx customers within coverage, claims to offer fibre-like speeds at 20Mbps, much faster than Streamyx which currently offers its highest speed package at 8Mbps for RM160/month. The wireless modem that can connect up to 64 devices simultaneously is provided for free under a 24-month contract.

• The Unifi Air wireless plan offers unlimited quota for only RM79/month vs the recently revised RM69/month for existing Streamyx customers and RM89/month for new Streamyx customers for the 8Mbps plan. However, new users will have to pay RM129/month for Unifi Air plan.

• TM indicated that there are 35,000 Streamyx customers that are within their TDD-LTE coverage and TM will be contacting these customers to offer them the option to upgrade.

• This development follows 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.

• Hence, we are not surprised by the introduction of this new service as TM had announced that the group would attempt to solve the 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.

• 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 5% and FY20F by 14% 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 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 - 7 Aug 2019