Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) 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.

• Our forecasts are maintained as TM’s 1HFY17 normalised net profit of RM438mil was largely within our expectations, accounting for 51%-52% of our and street’s FY17F earnings. As a comparison, 1H accounted for 42%-46% of FY14-FY16 normalised earnings. TM declared a slightly higher 2QFY17 dividend of 9.4 sen, which is still in line with expectations.

• We expect depreciation charges, which slid 6% YoY in 1HFY17, to pick up more aggressively in the subsequent quarters as 2QFY17 capex/revenue rose to 18.4% from 11.9% in 1QFY17. TM’s 1HFY17 capex/revenue is only 15% vs management’s unchanged FY17F capex/revenue guidance of a high-20% to low-30% range vs 27.5% in FY16 and 21.4% in FY15.

• Additionally, 2QFY17 operating costs, which rose 6% QoQ and 3% YoY to RM2.2bil, may further gather momentum with the efforts to expand the group’s broadband and LTE networks.

• Revenue was flat QoQ in 2QFY17, which translated to a weak increase of 1% YOY in 1HFY17 as higher internet and data revenue were offset by lower sales of voice and indefeasible rights of use for submarine connectivity. Pending further guidance from the next quarter, we may lower our current FY17F revenue growth assumption of 3.9% vs management’s unchanged KPI guidance of 3.5%-4%.

• TM’s 2QFY17 normalised EBITDA decreased 6% QoQ to RM902mil from higher charges from webe site rentals and licensing fees, increased costs for a one-off government project and marketing expenses. With an 11%-point increase in effective tax rate to 44% (due to higher deferred tax provision), the group’s 2QFY17 normalised net profit decreased by 10% QoQ.

• Recruitment rates for new UniFi customers slowed down slightly to 28,000 from 30,000 in 1QFY17, with the base crossing the 1mil threshold while Streamyx lost 39,000 customers to some cannibalisation from Unifi and webe. UniFi ARPUs slid sequentially by RM1/month to RM200/month while Streamyx was flat at RM90/month.

• Webe’s penetration of TM households has risen to 5.6% from 4.2% in the previous quarter, on track to reach its target of 8%- 9% by end-2017. As this translates to a small customer base of 230k currently, we expect its losses to continue to drag the group’s mass market and management account divisions.

• 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%. We continue to expect the group’s convergence strategy to offer quad play services to eventually lead the path towards sector consolidation.

Source: AmInvest Research - 30 Aug 2017