Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM), forecasts and fair value of RM7.90/share based on an FY17F EV/EBITDA of 9x, which is at a 35% discount to Singapore Telecommunications Ltd’s 14x as the possibility for a likely remerger with Axiata Group reduces the valuation differential.

• Our forecasts are maintained as TM’s 1QFY17 normalised net profit of RM230mil was largely within our expectations, accounting for 28% of our and street’s FY17F earnings. As a comparison, 1Q accounted for 20%-26% of FY14-FY16 normalised earnings. No 1QFY17 dividend was declared, as expected.

• We expect depreciation charges to pick up more aggressively in the subsequent quarters given management’s unchanged FY17F capex/revenue guidance at a low 30% range vs. 27.5% in FY16 and 21.4% in FY15. This is further supported by 1QFY17 capex/revenue increase to 11.9% from 11.1% in 1QFY16.

• Additionally, operating costs, which declined 11% QoQ in 1QFY17, may gather momentum with the efforts to expand the group’s broadband and LTE networks.

• Although revenue declined sequentially by 8% from lower sales of voice and indefeasible rights of use for submarine connectivity together with the absence of Universal Service Provider grant recognition, it is still up 3.8% YoY, in line with our projection.

• TM’s normalised EBITDA was flat QoQ at RM958mil as the lower revenue was mostly offset by lower operating costs. However, the group’s 1QFY17 normalised net profit decreased by 15% QoQ largely due to the higher tax rate of 33% (driven up by webe’s continuing losses) vs. only 2% (due to lumpy recognition of investment tax allowances) in 4QFY16.

• Recruitment rates for new UniFi customers gathered momentum, increasing by 30,000 from 28,000 in 4QFY16, with the base reaching 979,000. UniFi ARPU was stable sequentially at RM201/month while Streamyx declined RM2/month to RM90/month.

• Webe has achieved a penetration of 4.2% of TM households from 2% in the previous quarter with an aim to reach 8%-9% by end-2017. Based on TM’s fixed and UniFi customer base of 4.2mil, this translates to a customer base of 176K currently and a target of 335K-376K by the end of the year, which still represents a slight 1% of the top 3 cellular operators’ combined customer base.

• We will provide further updates after the analyst briefing later today. We expect the group’s convergence strategy to offer quad play services to lead the road towards sector consolidation. The stock currently trades at an attractive FY18F EV/EBITDA of 7x, half of SingTel’s 14x. Its dividend yields are fair at 3.3%

Source: AmInvest Research - 23 May 2017