Investment Highlights

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

• Pending an analyst briefing later today, we maintain our FY19F– FY21F earnings forecasts even though TM’s 9MFY19 normalised net profit of RM811mil appears to be above expectations, accounting for 83% of our FY19F earnings and 89% of consensus. We note that our FY19F net profit is currently 7% above consensus.

• As a comparison, the first 9 months accounted for 63%–74% of FY14–FY17 normalised earnings. The group did not declare any interim dividend payment as expected with management maintaining its guidance of 40%–60% of PATAMI.

• TM’s 9MFY19 normalised earnings rose 54% YoY mainly from lower depreciation (-33% YoY), operating expenses (-13% YoY) and sharply reduced impairments (-RM877mil). The lower opex stemmed from decreases in direct costs (-15%), other expenses (-30%) and materials (-41%), supported by the group’s transformative Performance Improvement Programme (PIP). This ongoing initiative, carried out since mid-2018, has led to cost optimisation in content/sponsorship costs, contract renegotiations, marketing, business procurement and Unifi mobile’s domestic roaming arrangements.

• However, the group’s 9MFY19 capex decreased by 44% YoY to RM736mil, accounting for only 8.8% of revenue vs. management’s guidance of 18%. This implies that capex could sharply accelerate in 4QFY19.

• On a QoQ comparison, TM’s 3QFY19 normalised net profit rose by 27% to RM288mil due to lumpy non-telco related revenue recognition (+104mil) and lower impairments (-RM130mil). However, excluding non-telco income, 3QFY19 revenue trajectory remains unexciting, contracting 1% QoQ and 4% YoY to RM2.3bil as the declines in voice and Streamyx pricing adjustments exceeded data usage. Unifi’s 3QFY19 average revenue per user (ARPU) fell by RM2/month QoQ and RM19/month YoY to RM167/month.

• Against the backdrop of TM upgrading Streamyx users by 2021, net broadband subscribers fell 3K as new Unifi users of 34K were more than offset by Streamyx users, which shrank 5% QoQ and 23% YoY to 786K in favour of other fixed and wireless broadband providers. YoY, we note that Maxis’ fibre customer accretion (home and business) of 126K has edged Unifi’s 112K.

• 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 - 26 Nov 2019