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.

• Hot on the heels on the free Unifi Home promotion until 31 December 2019, TM has finally reduced its Unifi broadband offering for business users since the revision of its Unifi Home broadband plans in July last year. The base Unifi Biz plan currently offers 100Mbps at RM139/month, which is 60% cheaper than the previous RM349/month.

• The 30Mbps Unifi Biz Advance and 100Mbps Unifi Biz Pro plans are getting a “Turbo Upgrade” to speeds of 300Mbps at RM249/month and 800Mbps at RM349/month respectively.

• For the 100Mbps plan, Unifi includes Simple Voice Plan 30 that offers RM30 worth of local calls. The Biz Advance and Biz Pro plans are bundled with Simple Voice Plan 50 (RM50) and 70 (RM70) respectively that come with free calls to fixed lines.

• Together with the year-end “Pay Nothing” promotion for new Unifi Home subscribers, new Unifi Business subscribers also enjoy fee waiver until 31 December 2019.

• The 100Mbps Biz Plan at RM139/month is at parity with Maxis’ OneBusiness Fibre, which also bundles unlimited domestic voice calls and a free backup wireless 4G LTE connection.

• While TM’s 800Mbps package at RM349/month is also at parity with Maxis’ plan, TM’s 300Mbps plan is still RM50/month higher than Maxis’ RM199/month.

• Assuming Unifi business users account for 10% of its 1.3mil Unifi subscribers currently, we estimate that a 40% rate cut could reduce TM’s FY20F earnings by 12%.

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

• Additionally, we remain cautious on TM’s prospects from the potential impact of the National Fiberisation and Connectivity Plan (NFCP) which could further halve entry price packages next year while significantly raising the capex levels of fibre infrastructure owners.

• 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 - 2 Oct 2019