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.

• Our forecasts are maintained following an analyst briefing yesterday, even though TM’s 9MFY19 normalised net profit of RM811mil appears to be stronger than our expectations. These are the salient highlights of the briefing:

• Management indicated that capex will be slightly lower than its guidance of 18% to revenue, which could mean 4QFY19 spending could surge to over RM1bil from just RM286mil in 3QFY19 and RM736mil in 9MFY19.

• Sale of land at TM Facilities contributed to 40% of the 22% QoQ surge in 3QFY19 other revenue, which translates to an estimated one-off profit of RM30mil – 10% of 3QFY19 normalised earnings.

• Operating expenditures, which fell 13% YoY to RM5.5bil in 9MFY19, remain on track and management does not expect any backloaded provision in 4QFY19.

• As the group has not revealed its capex guidance for FY20F at this juncture, we expect greater clarity on the spending requirements for the Fiberisation and Connectivity Plan (NFCP) early next year.

• As part of its plan to position TM as the wholesale 5G infrastructure provider, the group is aggressively aiming to secure as much of the 700MHz spectrum as possible to provide better coverage for rural and remote areas. Given that the price component of the 700MHz has been set at RM21.6/MHz, the 8 blocks of 2 x 5MHz could cost RM1.7bil – 15% of TM’s FY20F revenue. This does not include additional fees for the 3.5GHz spectrum, which has not been priced at this stage yet for 5G usage. With TM’s FY19F net debt/EBITDA at 1.2x, the risks of lower-than-expected dividend payouts could rise next year.

• TM has managed to migrate over 400K Streamyx customers to Unifi via fibre and wireless options, which comprise most of the 662K decrease in users over the past 3 years. The cost to upgrade the copper wire-based Streamyx service to Unifi remains part of the group’s FY19F capex guidance. Nevertheless, 3QFY19 net broadband subscribers still declined by 3K as new Unifi users of 34K was more than offset by Streamyx users decline. Increasingly, new rivals are entering the fibre broadband segment with Maxis' fibre customer accretion (both home and business) of 126K edging ahead of Unifi's 112K.

• We remain cautious on TM’s prospects from the potential impact of the NFCP which could further halve entry price packages next year while significantly raising the capex levels of fibre infrastructure owners. Hence, the stock currently trades at a fair FY20F EV/EBITDA of 5x with a decent dividend yield of 4%.

Source: AmInvest Research - 27 Nov 2019