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’s forecasts are unchanged following our recent virtual meeting with its corporate finance and investor relations vicepresident Delano Abdul Kadir. These are the salient highlights:
  • Management is sanguine on TM’s recent 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. Recall that the collaboration is driven by the National Fiberisation and Connectivity Plan’s (JENDELA) target to reach 7.5mil premises by end-2022 from 5.7mil premises as at 31 March 2021.
    While Astro could emerge as another player in the retail fibre broadband segment, TM believes that the revenue increase in wholesale segment could more than offset any potential loss in unifi income from gains in Astro’s market share. We note that TM’s unifi subscribers still registered a record 188K (+7% QoQ) to 2.1mil in 2QFY21 even though Astro already had similar partnerships with other broadband providers, Maxis, Time dotCom and Tenaga Nasional’s wholly-owned Allo Technology.
    ​​​​​​​While Astro is likely to bundle its propositions with content, TM, which has been increasing its unifi TV content, does not expect Astro to compete on pricing alone, pending details on its product launches.
  • As the wholesale arrangement will need to cater for the mandatory standard access pricing structure as well as value-added services for a nationwide bandwidth launch, Astro’s retail subscription rates will need to rapidly escalate against TM’s strong inherent incumbency, backed by its ownership of the high-speed and sub-urban broadband networks.
    For example, Astro will need to lease wholesale connectivity for an entire high-rise building even though only a portion of residents may opt for its new broadband plans with TM still likely to control the majority market share. Should new subscribers opt for Astro’s retail fibre plans, the wholesale revenue from that building will still accrue to TM.
    This could mean that Astro’s superior content offerings, which include local shows and options for over-the-top providers Netflix, Disney+Hotstar and Fox channels, could further drive up TM’s wholesale data demand and support this segment’s upward revenue trajectory.
  • Meanwhile, wholesale prices are expected to continue declining in tandem with global trends, which TM hopes will be more than offset by data demand escalation driven by a growing digital world and work-from-home arrangements. Currently, TM is evaluating plans to invest in another submarine cable given the rapid increase in international data traffic.
    So far, this has been underpinned by 1HFY21 data revenue rising 15% YoY to RM1.5bil. Recall that TM’s wholesale segment, which accounts for 21% of 1HFY21 revenue, registered an impressive 20% YoY growth.
  • TM One, which accounted for 32% of 1HFY21 group revenue, is still slowly recovering from the Covid-19 pandemic amid a weak economic scenario as small-medium enterprises continue to face movement restrictions while government contract rollouts tend to gather pace only towards 4Q. This segment’s immediate growth outlook remains uncertain as the government’s selection of TM as the only local cloud service provider has yet to gather momentum amid the latest political changes. In 2QFY21, TM One’s revenue slid 4% QoQ.
    Recall that TM One is the group’s business-to-business arm, servicing enterprises, the public sector and various industries with cloud, connectivity, cybersecurity and smart services.
  • TM is currently negotiating a 10-year leasing arrangement for its fibre infrastructure to Digital Nasional, which is aiming an initial rollout of 5G services in selected areas in Kuala Lumpur, Putrajaya and Cyberjaya starting Dec 2021 with the objective of achieving 80% nationwide population coverage by 2024.
    ​​​​​​​Notwithstanding TM’s weak cellular market position, we believe that the upcoming 5G rollouts could level the current 2G/4G service coverage disparity between unifi mobile and other more established mobile operators.
  • TM’s capex, which rose 25% YoY to RM597mil in 1HFY21, accounting for 10.7% of revenue, is likely to increase given management’s earlier guidance of 14%–18%. TM expects any funding requirement for future capex will be raised internally given a healthy FY21F operating cash flow of RM3.8bil, low FY21F net debt/EBITDA of 0.7x, unutilised sukuk line of RM5bil and if needed, its dividend reinvestment plan.

• 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. Given TM’s critical role in the MyDigital initiative with its ownership of the nationwide fibre network, we expect a faster pace of growth for its wholesale revenue beyond FY21F. Likewise, TM One’s longer term 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 FY22F EV/EBITDA of 5x vs. its 3-year average of 6x, with a fair dividend yield of 3%.

Source: AmInvest Research - 6 Oct 2021