Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with unchanged forecasts and DCF-based fair value of RM4.25/share based on a WACC of 7.3% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 5x.

• Yesterday, the Cabinet approved the implementation of the National Fiberisation and Connectivity Plan (NFCP) over a 5- year period from this year to 2023 at a cost of RM21.6bil. This is in line with the government's objective to recognise access to the internet as a basic right, ensuring equal access to the internet for both urban and rural residents.

• Recall that the NFCP targets are: i) entry-level fixed broadband packages at 1% of GNI by 2020; ii) Gigabits availability in selected industrial areas by 2020 and state capitals by 2023; iii) 100% availability at a minimum speed of 500Mbps in state capitals and selected high-impact areas by 2021; iv) 20% availability at up to 500Mbps in sub-urban and rural areas by 2022; v) fibre network coverage at 70% of schools, hospitals, libraries, police stations and post offices by 2022; vi) average speeds of 30Mbps in 98% of populated areas by 2023; and vii) to improve mobile coverage along the Pan Borneo Highway upon completion.

• To achieve the NFCP target, the current 1.9mil premises with fibre access have to be increased by 1.5mil by 2021, 502K premises with Gigabits access have to be increased by 3mil by 2023, 25 industrial areas to be expanded for Gigabits access by next year, 121K sub-urban and rural premises have to be increased by 1.2mil by 2022, 6,195 towers (+18%) to be added by 2023 to expand 4G + coverage and widen coverage to 1,177 Felda and Orang Asli settlements by 2023.

• The NFCP requires: i) 50%–60% of the investment cost to be provided via the MCMC's Universal Service Provider fund which currently holds RM8bil; ii) sharing access to passive telco and civil infrastructure amongst operators and stakeholders; iii) continuous technology improvements; iv) optimising spectrum allocation for higher quality services; v) improved regulatory framework and policy certainty to support new investments in 5G; vi) reduction of costly, bureaucratic and uncoordinated state-level right-of-way in building telco infrastructure; and vii) improve regulatory coherence and consolidate action from all stakeholders to address issues on the ground.

• Given TM’s role as the national broadband provider, the group will likely bear up to half of the NFCP cost, which translates to RM2.2bil over the next 5 years. Besides TM’s own capex requirements, the NFCP rollout alone translates to 19% of FY20F revenue — already above management’s FY19F capex target of 18% and 8% in 1HFY19. Additionally, the thrust of the NFCP towards connecting the rural population could mean that revenue accretion from these investments will be minimal.

• Against the backdrop of rising capex needs and tepid revenue growth trajectory, the stock currently trades at a fair FY20F EV/EBITDA of 5x with a decent dividend yield of 3%.

Source: AmInvest Research - 29 Aug 2019