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 Investor and Analyst Series event yesterday which showcased the group’s network technology, presented by its chief network officer Mohamed Tajul Mohamed Sultan. These are the highlights:
  • TM’s nationwide network currently deploys over 600K km of fibre-optic cables, over 246K km of copper cables, 300 submarine cable systems which cover over 300km, 28 pointsof-presence worldwide, 4,500 LTE sites, over 13K Wi-Fi hotspots and 9 data centres – 8 in Malaysia and 1 in Hong Kong (Exhibit 1). unifi currently serves 2.7mil homes, over 380K SMEs and 12K enterprise/public sector offices.
  • The global Covid-19 pandemic has accelerated broadband demand with overall data traffic surging by 2.4x to 8,890 Gbps from 3,758Gbps in Jan 2020 before the first movement control order. Average data download per customer has doubled to 470GB/month in Sep 2021 from 238GB/month in Jan 2020 (Exhibit 2).
  • TM’s fibre network has reached 5.5mil premises currently, in line with the MCMC’s National Fiberisation and Connectivity Plan’s (JENDELA) first phase target to reach 7.5mil premises by end-2022. Under the 12th Malaysian Plan, JENDELA’s target will be raised by 1.5mil premises to 9mil.
  • TM aims to cover 85% of Malaysian premises by 2025 in which 6mil premises will not involve duplicated rollouts. This will be deployed based on connectivity requirements with new installations and migrating Streamyx to unifi. For remote areas, which cover 15% of premises, TM will deploy fixed wireless access with its own spectrum or wholesale arrangement with other operators and satellite systems.
  • TM plans to modernise its network via fiberisation, simplify its architecture for the next generation with single-layer core/aggregation and transition towards multi-access edge cloud. This is envisioned to reduce the group’s 700 physical switching centres to just 2 in Malaysia with the cloud-based software system enabling virtual network functions. Together with the transition of over 100 sites to data centres, this is expected to reduce operating expenses in future, partly offset by increased software licencing costs.
  • The next-gen infrastructure will involve rolling out 5G radio access network sites, deploy telco cloud, modernise IP and optical transport network, establish an end-to-end digital and analytical framework, develop 7 domestic/international submarine cables and simplify radio and TV broadcast platforms by shutting down legacy sites by 2025 (Exhibit 3).
  • Network costs account for the major share of TM’s capex, in which 81% stems from access and core network expenses in 1H2021. With the modernisation activities spread out until 2025, management indicated that new emerging technology will continue to drive TM’s prospective capex over the next 2–3 years. Even so, the group expects prospective capex/revenue ratio to remain within 14%–18% of revenue as guided for this year. Hence, we retain our FY22F–FY23F capex/revenue assumption of 18%.
  • Management is unable to provide guidance on 5G wholesale pricing, which is still under negotiation with the MCMC currently. Recall that the government-owned Digital Nasional, which will own, execute and manage 5G spectrum together with the infrastructure that is expected to cost RM15bil, expects the launch of its network in areas within Kuala Lumpur, Putrajaya and Cyberjaya beginning December 2021 with the objective of achieving 80% nationwide population coverage by 2024
  • We reaffirm our conviction that the upcoming 5G rollout will positively transform the cellular playing field for TM’s quadplay ambitions by levelling the spectrum disparity between operators. 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 - 26 Oct 2021