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 signed a 10-year fibre leasing service agreement which provides 5G RAN-to-Edge fronthaul and backhaul as a single end-to-end solution to Digital Nasional (DNB) for the provision of 5G wholesale services to telco operators.

• Given that the contract value of RM2bil over 10 years starts from 28 August 2021, we estimate that TM could be recognising an FY22F cost overprovision of RM67mil, which translates to a one-off net profit accretion of 5%.

• DNB’s reference access offer (RAO), recently published on its website, sets 5G wholesale capacity pricing at RM30,000 per Gbps on a monthly basis for the first 1,200Gbps, while subsequent capacity is at RM22,000 per Gbps.

• Assuming a net subscriber base of 1mil, we estimate that the wholesale capacity charge to TM’s unifi Mobile could reach only RM50mil annually. This will be easily dwarfed by the RM200mil annual wholesale revenue from DNB’s fibre leasing arrangement.

• All in, we estimate that the 5G reciprocal arrangement will initially enhance TM’s FY22F earnings by 10%, gradually tapering against the subsequent growth in mobile users’ data usage. Hence, we expect TM to sign up soon notwithstanding main cellular operators Celcom Axiata, Digi, Maxis and U Mobile pending agreement to the key terms of the RAO.

• So far, TM and YTL Communications are the only 2 telcos which reached an agreement with DNB in December last year on 5G services. However, TM has delayed the launch amid extensive internal tests.

• Recall that the government decided to retain DNB as the sole 5G wholesale network provider in the country, following discussions with mobile network operators (MNOs). The Ministry of Finance will no longer wholly own DNB, offering its equity stakes up to 70% to MNOs by the end of June 2022. However, the MNOs may be awaiting further details on the proposed shareholding offer before reaching an agreement.

• We remain positive on this earnings-enhancing development for TM’s quadplay ambitions as 5G rollouts could positively levelise the cellular playing field against larger and more entrenched operators. Additionally, 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.

• 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 FY22F. 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 Apr 2022