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 re-merger with Axiata Group reduces the valuation differential.

• While management appears to be unaware of any proposals of a re-merger, we do not discount that such plans may be in the review of Khazanah Nasional, which owns the major equity stakes in TM at 26% and Axiata at 37.6%.

• During the analyst briefing yesterday, we were introduced to the new managing director/group CEO Datuk Sri Shazalli Ramly, executive director/deputy group CEO Datuk Bazlan Osman and group CFO Nor Fadhilah Mohd Ali together with the rest of the new management heads.

• Shazalli, who re-joined TM from Axiata on 1 May this year, affirmed that his new role will be focused on rallying the group to be the country’s convergence champion and digitising the group’s core operational and service platforms.

• While this is aligned with the overall strategy outlined by his predecessor Tan Sri ZamZamZairani Mohd Isa, Shazalli’s forte in media, marketing and branding will push further for a higher share of customers’ moments/experiences with the use of analytics/big data in promoting quad play services.

• Management reaffirmed its FY17F targets: 3.5%-4% revenue growth, flat EBITDA and capex/revenue ratio of 30%-35%. This also means that operating costs, which declined 11% QoQ in 1QFY17, are expected to have a flat trajectory, including additional costs from the progressive rollout of webe’s LTE network, High Speed Broadband 2 and Sub-Urban Broadband.

• As voice revenues via copper cables continue to decline (-6% QoQ and -5% YoY in 1QFY17), the group’s revenue growth prospects stems largely from data and internet services provided mostly via its UniFi fibre-optic broadband and submarine networks.

• Hence, recruitment rates for new UniFi customers remains robust, increasing by 30,000 from 28,000 in 4QFY16, with the base reaching 979,000. This appears to be partly from its Streamyx base, which has declined 2% QoQ to 1.4mil.

• Webe, leveraging UniFi’s strength, still has a minimal subscriber base currently compared to the current celco incumbents. Expected to break even by next year, it will be targeting small and medium-scale enterprises, enterprise and public sectors.

• Based on a wholly digital platform, webe will shift away from traditional marketing outlets, with plans to introduce pre-paid services later this year.

• 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 - 24 May 2017