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 7.4% and terminal growth rate of 1%. This implies an FY20F EV/EBITDA of 5x.

• We have maintained FY20F–FY22F earnings as TM’s FY19 normalised net profit of RM1,001mil (excluding one-off fair value loss on subscription of exchangeable medium-term notes and network asset impairment) came in line with our and street’s expectations despite a strong 3QFY19.

• The group declared a single dividend of 10 sen, which was 2 sen lower than our estimate, translating to a payout ratio of 60%. Hence, we have adjusted FY20F–22F DPS accordingly.

• TM’s 4QFY19 normalised earnings fell 34% QoQ mainly from higher operating costs (+11%), depreciation (+9%) and effective tax rate due to losses from Unifi Mobile, partly offset by higher data-driven revenue. The higher opex stemmed from year-end spending on direct costs (+13%) and other opex (+20%).

• However, overall FY19 operating costs are declining, down 16% YoY to RM10bil due to the group’s Performance Improvement Programme (PIP). Likewise, the group’s FY19 capex decreased by 36% YoY to RM1.4bil, accounting for only 11.9% of revenue vs management’s earlier guidance of 18%.

• However, some of this projected capital spending could be carried forward into FY20F with management guiding for a higher capex of low-to-mid 20% of revenue, of which fiberisation is expected to account for 30%. As such, we have raised our FY20F capex assumption from 18% to 21%, translating to RM2.4bil.

• Against the backdrop of TM upgrading Streamyx users by 2021, net broadband subscribers rose by 26K as new Unifi users of 71K partly benefited from migration of Streamyx users, which fell by 45K. We note that Maxis’ FY19 fibre customer accretion (both home and business) of 120K is close Unifi’s 146K.

• Management is guiding for a low-to-mid single-digit revenue decline due to the full-year impact of Streamyx repricing on the retail segment. However, we caution that this may not have accounted for potential NFCP-driven cuts in Unifi prices later this year.

• We remain cautious on TM’s prospects from the potential impact of the NFCP which could further halve Unifi entry price packages this year while significantly raising the capex levels of fibre infrastructure owners.

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

Source: AmInvest Research - 24 Feb 2020