Headwinds Lead To Revised KPIs; Focus On Cost Optimisation

TM is offering new entry broadband packages at >40% reduction in prices and double the speed of existing broadband packages. Due to headwinds, TM lowered its 2018 EBIT guidance by 15% as cost optimisation will help preserve earnings and cash flow. We believe the lower earnings guidance is largely priced-in. Maintain BUY. Target price: RM4.30. The company aims to maintain its dividend policy of paying out RM700m or 90% of net profit, whichever is higher.

WHAT’S NEW

• Affordable 30Mbps UniFi below RM100 for low-income earners... Telekom Malaysia (TM) will introduce an affordable entry level UniFi at 30Mbps for targeted B40 (household earnings at least RM3,000) segment of the population. This would be below RM100, which is more than 40% less than the existing 30Mbps package.
• …and existing subscribers get free upgrade. Additionally, TM will gradually upgrade the speed for all of its existing unifi customers at more than double the speed at no extra cost starting 15 Aug 18, while new customers subscribing to existing unifi plans before 31 Dec 18 will also be upgraded accordingly in 2019. The introduction of new broadband and mobile plans is intended to: a) boost TM’s market leadership position, and importantly; b) deliver on the national broadband aspiration with respect to price, speed and coverage of the government.
• In light of earnings headwinds, TM lowers 2018 KPIs. Due to broadband price revision, intensifying competition and regulatory changes, TM revises its 2018 headline KPIs downward, expecting EBIT to drop 15% yoy to RM1b.

STOCK IMPACT

• Priced in, EBIT guidance appears to be in line with our and consensus expectations. The lower EBIT guidance appears to be largely priced-in as consensus is looking at 2018 EBIT and net profit estimates of RM684m and RM995m respectively. Importantly, TM is confident that its new broadband offering (of doubling the speed for free) will not lead to ARPU dilution as the majority of TM’s 2m customers are middle- to high-income earners who prefer higher speed and bigger bandwidth vs lower price points. Anecdotally, TM experienced marginal package downgrade when ‘double the speed for free’ broadband was introduced in 2017. In addition, the entry level UniFi package is expected to open up new customer segment for the group (the B40 group).
• Maintains dividend policy. Apart from new broadband packages – aimed at maintaining ARPUs and driving value added services (including the re-launch of unlimited unifi mobile packages, exclusively only for TM unifi customers), TM is expected to embark on cost optimisation efforts. Together with lower capex guidance, TM expects to maintain its current dividend policy of paying RM700m or 90% of net profit, whichever is higher, for 2018. We have pencilled in a 90% dividend payout, translating to a net dividend yield of 5%. At RM700m, the dividend yield is 6%.
• The low hanging fruit: prudent cost management. TM aims to defend near-term profitability and cash flow by assessing its opex and capex positions. The company will work towards increasing work productivity and sweating its assets (optimizing the network) while renegotiations with its vendors to ensure that the residential gateway can support higher speed beyond 30 Mbps.
• Capex guidance. TM lowered its capex guidance from high 20% of revenue to 20-22% of revenue. As TM plans on upgrading Streamyx subscribers to UniFi (for areas with such capabilities – given that the HSBB 2 rollout have been completed), there is no need to invest in new ports and will lead to lower capex requirements. At this juncture, TM’s capacity and bandwidth can cater to offer more than double the speed and therefore, the incremental cost in offering higher broadband speed to all customers is marginal.

EARNINGS REVISION/RISK

• No change to earnings. We project 2018-19 net profit of RM642m and RM656m after factoring in: a) 10% yoy drop in data revenue, b) 15% yoy drop in blended ARPUs in the next two years, and c) 20% yoy subscriber growth.
• Price points to attract new subscribers. On a brighter note, attractively priced broadband packages can potentially help drive subscriber growth, especially now that TM is expanding its rural network footprint under HSBB 2 and SUBB. We believe any earnings upside will come from upselling efforts for both the residential and enterprise broadband packages. ARPU uplift will come from premium channel buy-ins from the HyppTV product offering – which have been strong in the past 24 months.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower DCF-based target price of RM4.30 (discount rate: 7%; growth rate: 3%) in tandem with the earnings downgrade. At our target price, the stock trades at 23.5x 2019F PE and 6x EV/EBITDA.
• The stock is trading at -2SD from its long-term mean PE of 23x. The 51% ytd share price retracement appears to have largely priced in a worst-case scenario of an immediate 50% ARPU cut on all existing packages.
• Displaying agility to match market expectations. Based on the announcement made by the MCMC on mandatory standard access price (MSAP), lower wholesale broadband prices will induce competition within the industry and encourage new broadband packages that are affordable and at least 25% cheaper than current packages. TM’s newly launched product offering (to new and existing subscribers) reflects the company’s agility and ability to match technological advances with competitive pressures.

Source: UOB Kay Hian Research - 4 Jul 2018