According to the Communications and Digital Minister, MCMC is expected to conclude its talks with wholesale broadband service providers, resulting in broadband internet prices seeing significant falls after September 2023. The revision in wholesale prices is part of the new Mandatory Standard on Access Pricing (MSAP) that should have taken place early this year. Earlier, we had highlighted there is downside risk to Telekom Malaysia’s (TM) FY23-25F earnings once the new MSAP is adopted. In our current forecasts, we have factored in lower internet prices but we expect the impact on group’s earnings will be mitigated by the recognition of tax credit in FY23-24F as well as higher contribution from TM Global. We are forecasting FY23F earnings to fall by c.4% while FY24F will remain flat. Nevertheless, we do not rule further downside risk should the decline in wholesale rates be larger-than-expected. At this juncture, we make no changes to our earnings forecasts. Our Outperform call is predicated on TM’s leading position as the country’s network infrastructure provider, benefiting from the deployment of 5G network and growing demand for hyperscale data centres.

• Recap on MSAP. In February 2023, the Malaysian Communications and Multimedia Commission (MCMC) had released the new wholesale access pricing as per the MSAP structure. However, the MSAP can only take effect once the wholesale agreements between TM and access seekers are concluded. The MSAP sets the wholesale rates for various telecommunication services which include broadband access prices.

• Impact on earnings. Generally, the reduction in wholesale rates would have negative impacts on TM’s earnings given that it is the main network provider in the country. However, the actual impact will be dependent on its agreements with the respective telecommunication companies that are leasing the infrastructure from TM and these agreements are based on commercial contract that may differ from the MSAP level. In our opinion, TM could post lower profit in the early stage of implementation but earnings could rebound due to various cost optimisation measures in place. In addition, we expect the growing demand for data centres as well as the offering of more value-added services would minimise the impact of lower wholesale prices.

• Upcoming 3Q results. For the upcoming 3QFY23 results, we are not likely to see any significant impact arising from the MSAP, though TM could still make some provision of downward re-pricing of wholesale rates. Meanwhile, TM One should continue to deliver weaker performance due to the reduction in prices of large contracts but this may be mitigated by the recognition of tax losses, which will be set-off against profit.

Source: PublicInvest Research - 25 Sept 2023