Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with unchanged forecasts and 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.

• TM has entered into collaborative agreements with Astro Malaysia’s wholly-owned MEASAT Broadcast Network Systems to provide wholesale high-speed broadband (HSBB) services, bandwidth, backhaul and internet access for Astro’s customers.

• These include layer 3 HSBB service providing last-mile broadband connectivity to end customers and a new content delivery network for improved video streaming experience on minimum subscription periods of 2 to 5 years.

• Over the past years, Astro already has a non-exclusive strategic marketing partnership with related party Maxis to offer bundled fiberised broadband with content to their customers. Astro also has similar partnerships with other broadband providers, Time dotCom and Tenaga Nasional’s wholly owned Allo Technology.

• For TM, Astro’s superior content offerings, which include local shows and options for over-the-top providers Netflix, Disney+Hotstar and Fox channels could drive up the group’s wholesale data demand and support this segment’s upward revenue trajectory.

• In our view, the new arrangement with TM offers Astro the opportunity to launch its own fibre broadband service competitively against both unifi and Maxis’ home fibre.

• This could mean the emergence of a formidable fibre broadband competitor with Astro’s dominant TV household penetration rate of 73%, potentially dampening unifi’s growth momentum which registered a record 2QFY21 subscriber increase of 188K (+38% YoY). Pending details on Astro’s fibre launches, we are mildly positive on this fresh development.

• Meanwhile, the government’s MyDigital initiative allows licensed telcos with equal access to the infrastructure to roll out 5G services while cellular operators will not be burdened by the 5G capex.

• Being the owner of the nationwide HSBB network, we believe that this is positive for TM Wholesale in providing the critical backhaul backbone system for 5G networks. Recall that TM’s wholesale segment, which accounts for 21% of 1HFY21 revenue, registered an impressive 20% YoY growth.

• 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. All in, 5G rollouts could positively transform the cellular playing field for TM’s quadplay ambitions.

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

Source: AmInvest Research - 30 Sept 2021