Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM7.10/share based on a WACC of 6.2%, terminal growth rate of 2% and neutral ESG rating of 3 stars. This implies an FY21F EV/EBITDA of 7.4x, which is 43% below Maxis.

• Our forecasts are maintained following TM’s recent Investor and Analyst Series event which showcased the group’s unifi division, presented by its chief commercial officer Anand Vijayan. These are the salient highlights:
   
  • Unifi, which accounted for 43% of TM’s 1QFY21 revenue and 39% of operating profit, registered a robust 7.4% YoY revenue growth in 1QFY21. This is supported by unifi subscribers’ rise of 30.9% YoY to 2mil and partly offset by average revenue per user declining byRM9/month YoY to RM144/month. Recall that net broadband subscriber QoQ accretion surpassed 100K for the first time in 1QFY21, reaching 110K as fibre customers surged by 175K while Streamyx users fell 65K.
     
  • Data traffic continues to rise rapidly, reaching 6.3TB in 1QFY21, of which 77% came from domestic and 23% global. Mobile devices took up 53% of internet usage while desktops/laptops 30%.
     
  • Unlike TM One, which focuses on the government and corporates, unifi caters to the consumer/retail markets and small-medium enterprises (SME). The group continues to market its quadplay convergence proposition, offering fixed (telephony and broadband), mobile cellular, WiFi, content and smart digital services.
     
  • Unifi aims to offer enriched content & gaming experiences, security/surveillance, digital & cloud and SME solutions. These will be underpinned by a seamless lifestyle of fixed connectivity in the home/office and cellular services on the go. Hence, the group will be offering more bundled solutions with discounted options while upgrading customer care support with self-help mobile apps.
     
  • Management is optimistic on the initial 5G rollout in selected areas in Kuala Lumpur, Putrajaya and Cyberjaya beginning December 2021, with the objective of achieving 80% nationwide population coverage by 2024. Recall that the government-owned Digital Nasional will own the 5G infrastructure and spectrum while providing wholesale services to cellular players.
     
  • This will even out the current 2G/4G service coverage disparity between unifi mobile and other more established cellular incumbents, shifting the competitive advantage to TM, underpinned by its HighSpeed Broadband and SubUrban Broadband infrastructure. Currently, most cellular operators are offering bundled services with fibre offerings in selected areas.
     
  • TM also does not expect any significant cost changes from the renewal of the 4G multi-operator core network roaming arrangement with an external cellular operator, which is currently in a merger process with a former rival. The current roaming arrangement expires in February 2022 while the government intends to retire 3G networks by the end of the year. Rising data traffic from 4G and 5G usage will mean a reciprocal need for TM’s nationwide fibre backhaul infrastructure, and notably, value-added services above the current mandatory standard access pricing regime.
     
  • Unifi’s operating costs, which declined 8.8% YoY in 1Q2021, is expected to improve further gradually from the group’s continuing optimisation initiatives which began 3 years ago. Supported by lower losses from unifi mobile, recall that this supported a 2.9x improvement in unifi’s 1QFY21 operating margin to 21.5% from just 7.5% in 1QFY20.

• All in, 5G rollouts could positively transform the cellular playing field for TM’s quadplay ambitions. Given TM critical role in the MyDigital Initiative with its ownership of the High-Speed Broadband network, we expect a faster pace of growth for its wholesale revenue beyond FY21F. Likewise, TM One’s revenue growth could also accelerate with the group’s appointment as the sole Malaysian cloud provider for government data.

• The stock currently trades at an attractive FY21F EV/EBITDA of 6x with a fair dividend yield of 3%.

Source: AmInvest Research - 21 Jul 2021