Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM4.15/share based on a WACC of 7.4% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 5x, at parity to its 2-year average.
   
• TM’s stake in Webe Digital Sdn Bhd (webe) has risen to 91.8% from 72.9% with the exchange of its RM187mil exchangeable medium term notes (MTN) for Green Packet’s remaining 5.2mil webe shares and 37mil convertible unsecured MTNs. SK Telecom Co Ltd will hold the remaining 8% stake in webe.
   
• The current MTN programme requires Green Packet and TM to determine the exchange price by separately engaging external professional valuers to undertake a fair valuation exercise for webe’s securities. However, this variation allows both parties to bypass this lengthy and costly valuation exercise.
   
• webe was originally branded as Packet One Networks (P1) and later rebranded to unifi Mobile by TM, which acquired an initial 57% equity stake for RM350mil in 2014. webe currently holds bandwidths of 30MHz block for the 2300MHz WiMax band and 20MHz for the 2600MHz 4G spectrum. However, unifi Mobile also utilises its TMgo 850 MHz LTE band 5 spectrum (refarmed from TM’s CDMA service), while Axiata Group’s Celcom provides domestic roaming on 3G and 2G.
   
• This exercise translates to a one-off 7% cut to FY20F earnings and a 9% decrease in net assets largely due to deemed fair value loss of RM67mil. webe continued to suffer from losses even after being absorbed into TM's unifi division over the past 2 years. Assuming an annual webe loss of RM50mil together with the absence of 8% MTN coupon rate income, we estimate that the additional stake could reduce TM’s FY21F–FY22F earnings by a slight 2%. However, we understand that TM hopes to return to EBITDA positive by next year, which could partly mitigate the earnings impact. Additionally, webe has accumulated losses of over RM300mil which can negate future tax liabilities.
   
• While the rationale for this exercise is to consolidate the group’s ability to expand wireless broadband to underserved and rural areas while facilitating TM’s convergence strategy, we are mildly negative on this development given the near-term earnings dilution. We understand that the group is still aiming to be the sole 5G wholesale operator notwithstanding uncertainties under the Malaysian Communications and Multimedia Commission’s spectrum review currently.
   
• 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. Against the backdrop of higher capex needs and weak near-term earnings outlook, the stock currently trades at a fair FY21F EV/EBITDA of 5x with a decent dividend yield of 3%.

Source: AmInvest Research - 27 Jul 2020