Investment Highlights

• We reiterate 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 FY22F EV/EBITDA of 6x, in line with its 3- year average.

• TM has accepted the Malaysian Communications and Multimedia Commission’s (MCMC) spectrum assignment (SA) offer of 20MHz block of the 2600MHz spectrum for continued deployment of 4G services at an upfront price component of RM7mil and a fixed annual fee of RM6mil for 5 years commencing on 1 July 2022.

• As guided by our update yesterday, we maintain TM’s earnings forecasts given the relatively minimal impact notwithstanding the higher SA fees compared to the earlier apparatus assignment charge of RM1mil annually, based on the number of base stations. We also expect TM’s FY21 results, which will be announced on 25 February, to come in generally within expectations.

• TM’s SA fees are based on the deployment of time division duplex access which was originally awarded to Packet One Networks (subsequently rebranded to webe and finally, unifi Mobile). Hence, TM’s charges are substantively lower than those levied on other cellular operators operating on the frequency division duplex system.

• Recall that cellular operators have accepted the MCMC’s SA offer of 20MHz block of the 2600MHz spectrum for continued deployment of 4G services at a price component of RM12mil and a fixed annual fee of RM21mil for 5 years commencing on 1 July 2022.

• Even though concerns have risen on the potentially high fixed wholesale capacity charge from Digital Nasional’s 5G network, 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 - 15 Feb 2022