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 (SingTel) 14x as the possibility for a likely re-merger with Axiata Group reduces the valuation differential.

• TM’s equity stake in webe could potentially rise from 72.9% currently to 85.9% from the group’s subscription of RM495mil nominal value of the third and final tranche issuance of webe’s convertible medium term note (CMTN) programme.

• The proceeds of this third tranche CMTN subscription will be utilised to fund the implementation of webe’s business plan. In total, we estimate that TM has issued RM1.6bil under this CMTN programme, which is within our FY17F capex/revenue assumption of 30%.

• With the conversion of the CMTN, Green Packet’s stake in webe could drop from 13.2% to 10.3% and Korea’s SK Telecom Co. Ltd from 4.8% to 3.8%.

• Recall that TM had acquired a 55% equity stake in P1 (which has since been renamed to webe) for RM350mil cash back in 2014 as part of its plans to spearhead the group’s convergence strategy of offering unified solutions through the bundling of fixed, wireless and mobile broadband services.

• Hence, webe has been appointed the “Mobility Centre for Excellence”, which includes TMgo broadband services. webe currently targets the urban population while TMgo’s focus has been on the rural segment. This forms TM’s convergence strategy in the delivery of end-to-end broadband and data services.

• webe’s penetration of TM households has risen to 5.6% in 2Q2017 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. TM currently no longer provides webe’s financial performance as it is part of the group’s mass market segment.

• 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 - 29 Sept 2017