Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with unchanged forecasts and DCF-based fair value of RM3.50/share based on a WACC of 7.3% and terminal growth rate of 1%. This implies an FY20F EV/EBITDA of 5x.

• TM has introduced a new #khabarbaik promotion for its Unifi Home fibre broadband service wherein new subscribers will not need to pay monthly subscription until 31 December 2019. This means that new subscribers will enjoy free fibre broadband services for up to 3 months vs. one month that had been offered earlier.

• This promotion will be applicable for any TM Unifi fibre broadband plan which is tied to a 2-year contract. This promotion will also be available for existing users with expiring contracts in the next 3 months.

• There is also a lucky draw incentive to apply for Unifi Home plans between 1 October and 30 November 2019 via online application as a daily winner could win free internet for 12 additional months, starting January 2020 to December 2020.

• Currently, TM’s entry level plan at 30Mbps plan is priced at RM79/month with a quota of 60GB. This can be topped up with RM20/month for unlimited calls. TM has also introduced an unlimited quota plan at 30Mbps for RM89/month.

• Assuming average revenue per user at RM100/month over 24 months for its existing customers of 1.3mil, we estimate that TM’s FY19F earnings will only be marginally eroded by 1%.

• We are neutral on this development as TM appears to be stepping up its promotional efforts to drive new Unifi subscription rates which have lagged Maxis’ this year. In 2QFY19, TM’s new fibre broadband subcribers rose 16K QoQ and 41K YTD vs. Maxis’ 25K QoQ and 50K YTD.

• We remain cautious on TM from the impact of the National Fiberisation and Connectivity Plan (NFCP) which could halve entry price packages next year while significantly raising the capex levels of fibre infrastructure owners.

• Given TM's role as the national broadband provider, the group could bear almost half of the RM22bil NFCP cost notwithstanding the involvement of other operators and their existing capex programmes. Besides TM's own capex requirements, the NFCP rollout alone could translate to 19% of its 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 4%.

Source: AmInvest Research - 1 Oct 2019