WHAT’S NEW

Telekom Malaysia (TM) is unveiling its new UniFi basic broadband with speeds of 30mbps that will be limited exclusively to households with income of RM4,500 and below. Data usage for UniFi basic is capped at 60GB and priced at RM79. The UniFi basic plan will be made available exclusively online and from 15 August. This is in line with the government’s aspiration to ensure all Malaysians enjoy affordable and seamless digital experiences.

Additionally, TM announced that it is increasing broadband speeds by up to 10x for its 1m UniFi subscribers in stages, starting from 15 Aug 18. The company is confident that they can grow revenue given wider access and higher speed to its broadband network. Upon its launch in 2010, Unifi was priced at RM199 with a 10Mbps broadband speed. In 2016, the RM199 package was upgraded to 30Mbps.

COMMENT:

• Positive newsflow, lifting policy overhang. We expect clarity on the new UniFi packages to lift policy overhang on the stock. The stock trades at -2SD from its mean PE of 25x. To recap, Communications and Multimedia Minister Gobind Singh Deo told fixed broadband operators to slash prices by at least 25% by the year-end, following the implementation of the Mandatory Standard on Access Pricing with effect from 8 June.
• Higher subscriber will boost revenue, ARPU dilution due to customer downgrading. Based on TM’s new UniFi offers, for the same price points, customers will enjoy between 100Mbps to 800 Mbps (from 20Mbps to 100Mbps). This, we opine, could lead to package downgrades in the near term. We have factored in a 15% decline in ARPUs over 2018-19, and we believe this will adequately capture ARPU dilution given the new package speed.
• 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 (optimising network) while engaging in renegotiations with its vendors to ensure that the residential gateway can support higher speed beyond 30 Mbps. As TM plans on upgrading Streamyx subscribers to UniFi (there are about 340,000 Streamyx customers in UniFi area), there is no need to invest in new ports and this 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.
• No change to earnings forecasts. We project 2018-19 net profits of RM642m and RM656m after factoring in: a) 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.
• 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%.
• Maintain BUY with a DCF-based target price of RM4.30 (discount rate: 7%; growth rate: 3%). At our target price, the stock trades at 23.5x 2019F PE and 6x EV/EBITDA.

Source: UOB Kay Hian Research - 13 Jul 2018