Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) but with a higher DCF-based fair value of RM4.15/share (from an earlier RM3.50/share) based on a WACC of 7.4% and higher terminal growth rate of 2% from 1% previously on moderating pressure on fixed broadband rates. This implies an FY20F EV/EBITDA of 5x, at parity to its 2-year average.

• Following our teleconference with TM’s corporate finance & investor relations team yesterday, we have slightly raised TM’s FY20F–FY22F earnings by 2% on lower operating cost assumptions. These are salient highlights of the call:

• Management indicated that the authorities have not been pressuring broadband operators to cut rates further for this year, in contrast to the National Fiberisation and Connectivity Plan which aimed to reduce entry-level packages to 1% of GNI, implying RM40/month.

• Datuk Noor Kamarul, who was appointed managing director/CEO in June last year, is realigning TM’s priorities by focusing on higher income yielding sites for broadband expansion and introducing more competitive products.

• Operational costs are expected to continue to improve, following the 16% YoY drop to RM10bil in FY19 due to the group’s Performance Improvement Programme). However, TM’s FY20F EBIT is expected to reach only RM1.4bil vs. RM1.6bil in FY19 due to higher capex rollouts in tandem with the group’s network improvement efforts.

• While management indicated that the movement control order (MCO) may slow down the projected FY20F capex of RM2.8bil, the guidance of low-to-mid 20% of capex/revenue is maintained as rollouts could be ramped up after the MCO.

• So far, TM has spent RM10mil out of the RM400mil earmarked for the Covid-19 economic stimulus package to improve network quality. While this accelerates TM’s rollout plans, its capex guidance may be revised in 2QFY20 due to the MCO prerogatives.

• While net additions of Unifi subscribers have fallen on reduced churn during the first 2 weeks of the MCO with the closure of TM One kiosks, average revenue per user (ARPU) may experience lower pressure with minimal discounts being offered during this period, except on a case-by-case basis for some SMEs which include bill payment deferrals. Although no discounts are being offered to retail segment, free content such as video-on-demand is being offered currently. However, Streamyx ARPU, which fell RM15/month to RM96/month in 4QFY19, is expected to drp[ further due to the full-year repricing impact from last year.

• Additional repair costs are unlikely as provisions are already budgeted for the recent undersea cable faults in the Asia Pacific Cable Network 2 which connects Malaysia to Singapore, Hong Kong and the USA.

• Foreign shareholding has fallen from a 2019 high of 14.3% to 11.5% currently. Against the backdrop of higher capex needs and weak near-term earnings outlook, the stock currently trades at a fair FY20F EV/EBITDA of 5x with a decent dividend yield of 3%.

Source: AmInvest Research - 14 Apr 2020