Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with a lower DCF-based (WACC: 7.5%; terminal growth: 1.5%) fair value (FV) of RM6.70/share (from RM7.20/share) (Exhibit 4) based on revised FY23F-FY24F earnings. Our FV implies an FY23F PE of 18.5x – near the 5-year mean of 18x. No change to our neutral 3-star ESG rating.

• The Malaysian Communications and Multimedia Commission (MCMC) released a new determination on the mandatory standard access pricing (MSAP) structure, which saw Layer 3 high-speed broadband (HSBB) network service’s 100Mbps service gateway cost being revised downwards by 51%-64% for 2023-2025 (Exhibit 1).

• The new rate implies an estimated net reduction of RM26-RM33 per month (2023-2025) (assuming a 10:1 contention ratio), given that there are no changes in the other two components of HSBB network service prices ie. broadband termination unit port and installation charges.

• Taking a cue from its 2018 playbook, TM likely will offer a free speed upgrade for its subscribers to defend its average revenue per user (ARPU) and soften the tradedown impact. Therefore, based on its existing offerings (Exhibit 2), the RM89/month plan likely will be boosted to 100Mbps speed (from 30Mbps) while the RM129/month will be upgraded to 300Mbps (from 100Mbps).

• Given the lesser steep discount for this structure vs. 2018 review together with increasing demand for higher speed internet, Unifi subscribers are more likely to stick with their existing plan and the impact to TM’s ARPU will be less significant vs. 2018, in our view.

• Recall that TM’s Unifi existing subscribers received a 10x speed upgrade in phases for the same monthly subscription fee following the previous MSAP review in 2018. For instance, 10Mbps plan subscribers were upgraded to 100Mbps while continuing to pay the same fee of RM129/month. Also note that Unifi used to charge RM329/month for 100Mbps before the upgrade and this implies RM200/month savings for 100Mbps subscribers.

• After the 10x upgrades were officially introduced in September 2018, Unifi’s ARPU declined by 21% after 1 year to RM153/month in 4Q19 and 28% after 3 years in 3Q21 (Exhibit 3).

• We anticipate a milder impact of ARPU, declining 11% over the next 3 years until FY25F given the current review. Imputing the decline in ARPU into our forecasts, we revised our FY23F/FY24F earnings lower by 10%/16%.

• Nevertheless, we maintain our BUY call on TM. We like the company given its position to benefit from the rising data traffic from 4G and 5G usage, which translate into higher demand for TM's nationwide fibre backhaul infrastructure. The 5G rollouts through single wholesale network also could positively levelise the cellular playing field against existing incumbents with larger subscriber market shares.

• Valuation-wise, the stock is trading at a compelling 14x, below its 5-year historical average of 18x while offering a decent dividend yield of 3%.

Source: AmInvest Research - 20 Feb 2023