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.

• Cellular operators have accepted the Malaysian Communications and Multimedia Commission’s spectrum assignment (SA) offer of 20MHz block of the 2600MHz spectrum for continued deployment of 4G services at an upfront price component of RM12mil and a fixed annual fee of RM21mil for 5 years commencing on 1 July 2022.

• While TM has yet to announce its own SA acceptance, the group already operates a 20MHz block of the 4G spectrum which was acquired earlier by Packet One Networks (subsequently rebranded to webe and finally, unifi Mobile).

• Notwithstanding that the earlier 4G bandwidth was under an apparatus assignment, the same block size under SA suggests that the annual charge is unchanged for the group. Hence, we expect that the earnings impact will be neutral for TM.

• Meanwhile, concerns have arisen on the impending 5G wholesale fixed capacity charge by the MOF-owned Digital Nasional that is unlikely to be offset in the near term by revenue growth from higher data traffic and value-added services.

• There is a possibility that Digital Nasional’s need for a recurring revenue profile to raise its own bonds could mean that cellular operators will eventually have to accept a potentially earningsnegative fee structure in the near-to-medium term to roll out 5G services. Currently, negotiations on the 5G wholesale arrangement are still ongoing with completion expected by the end of this month.

• Nevertheless, even though progressive revenue growth from 5G is unlikely to offset TM’s estimated fixed capacity charge of RM100mil annually (vs. RM400mil–RM500mil/year for other much larger cellular operators in terms of subscribers and data traffic), we understand that this could be largely mitigated by Digital Nasional’s reciprocal leasing of bandwidth from TM’s extensive nationwide fibre networks.

• Digital Nasional’s base capex of RM16.5bil is planned over 3 phases covering 10 years as follows:

• Phase 1 – 10% of populated areas including Putrajaya, Cyberjaya and Kuala Lumpur in 2021. Subsequently coverage will expand to 40% of populated areas in Penang, Johor, Sabah, Sarawak, Selangor, Negeri Sembilan and Perak in 2022.
  • Phase 2 – expand coverage to over 80% for all states by 2024.
  • Phase 3 – increase to over 90% coverage by 2027–2031.
• Rising data traffic from 4G and 5G usage will mean escalating demand 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 levelise the cellular playing field for TM’s quadplay ambitions against its larger operators.

• 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 - 14 Feb 2022