Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM5.05/share based on a WACC of 7.4% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 6x — at 1 standard deviation to its 3- year average of 5.5x.

• We maintain FY20F–FY22F earnings, which are 15%-17% above consensus, following a virtual engagement session with management yesterday. These are the salient highlights:
   
  • Amid the rising Covid-19 cases nationally in a potential second wave, TM has activated its crisis management response with business continuing as usual together with work-from-home arrangements. To date, TM has cleared the backlogs in fibre wiring installations which occurred during the April-May travel restrictions.
    
    So far, the group has not experienced any operational disruptions except for some service centres in malls or selected areas under currently enhanced movement control orders. Nevertheless, we are cautious on the viral resurgence which has led to additional movement restrictions in East Malaysia, Kedah, Putrajaya, KL and Selangor.
     
  • TM’s operating costs, which slid 4% QoQ in 2QFY20 despite a 1% revenue increase, surprisingly benefited from the Covid- 19 movement control order in April-May this year which reduced marketing/customer acquisition costs, installation and maintenance requirements due to travel restrictions. In the group’s drive to regain fixed broadband market dominance, management expects 2HFY20 marketing costs to move in tandem with revenue trajectory while manpower costs, which accounted for 23% of 1HFY20 revenue, is expected to decline from natural attrition and redeployment.
     
  • Management remains committed on TM’s Performance Improvement Programme (PIP), which envisions the reduction of operating expenditure by RM500mil-600mil over 5 years. The current CEO, Imri Mokhtar, who rejoined TM on 1 August this year, was one of the architects of the PIP when it was launched back in mid-2018. Recall that PIP focused on cost optimisation in content/sponsorship costs, contract renegotiations, marketing, business procurement and Unifi Mobile’s domestic roaming arrangements.
     
  • The government’s Jalinan Digital Negara (JENDELA) infrastructure plan has deferred the start of 5G to 2023 with copper-based connectivity being phased out by 2025. This is likely to mitigate substantive capex increases as the programme over the next 2 years will be focused on expanding 4G coverage from 5mil currently to 7.5mil premises, which is already incorporated in TM’s capex plans. Additionally, as TM has already incorporated accelerated depreciation of RM150mil/year (6% of FY20F depreciation) for its copper infrastructure since late last year, management does not expect any significant impairment impact going forward.
     
  • The group aims to cushion the industry-wide pressure on average revenue per user (ARPU) by offering better quality services via bundling of quad-play services, additional virtual marketing options for small-medium enterprises and customer care improvement. Recall TM’s 2QFY20 unifi ARPU slid 11% YoY to RM150/month.
     
  • TM expects to secure sales of indefeasible rights of use of submarine connectivity in November and December, which is when the group usually closes such deals. As in the past, this is likely to drive a strong 4QFY20 bottomline as the fourth quarter accounted for 26%-27% of FY17-FY19 revenue.
     
  • Management reaffirmed that while TM was revisiting its 2020 guidance, the group has not withdrawn its expectations for a low to single digit revenue decline, EBIT of over RM1bil and capex of low-mid 20% of revenue. Additionally, its 1HFY20 dividend payout of 60% could be sustained in 2HFY20 on the current earnings trajectory.
     
• The stock currently trades at an attractive FY21F EV/EBITDA of 5x with a decent dividend yield of 4.5%. In our view, TM can be re-rated even further if it opts to consolidate with mobile and fibre players (See our Sector Update on 11 August).

Source: AmInvest Research - 13 Oct 2020