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 9MFY17 normalised net profit of RM641mil was largely within our expectations, accounting for 75%-77%% of our and street’s FY17F earnings. As a comparison, 9M accounted for 63%-71% of FY14-FY16 normalised earnings as the final quarter tend to benefit from higher sales of indefeasible right of use (IRU) of submarine cables, leased lines and customer projects. TM did not declare a third interim dividend, as expected.

• The group has reclassified its mass market, managed accounts and global/wholesale business segments into UniFi, TM One and TM Global respectively.

• Revenue slid 1% QoQ in 3QFY17 due to lower universal service provider (USP) grant contribution, public projects and wholesale services. Management’s earlier FY17F revenue guidance of 3.5%- 4% now appears distant vs. growth of only 0.7% YoY in 9MFY17.

• TM’s 3QFY17 normalised EBITDA decreased 1% QoQ to RM889mil from the revenue dip, partly offset by a 4% operating cost decrease. A 12ppts reduction in effective tax rate to a more normalised 33% (due to higher deferred tax provision in the previous quarter) led to a mild 2% decline in normalised net profit of RM204mil.

• Capex/revenue rose to 25% from 11.9% in 1QFY17. We expect further capex ramp-up as TM’s 9MFY17 capex/revenue is only 18% vs. management’s FY17F capex/revenue guidance of a high- 20%, against an earlier guidance of up to low-30% range.

• The recruitment rate for new UniFi customers has surprisingly increased by 55,000 QoQ to 1.1mil, up from a quarterly increase of 28,000 in 2QFY17. However, Streamyx has lost 64,000 customers QoQ to 1.3mil, which indicated some migration to UniFi and other fixed and wireless broadband providers. Meanwhile, UniFi ARPUs slid sequentially by RM1/month to RM199/month while Streamyx added RM1/month to RM91/month.

• Unifi mobile has achieved a penetration rate of 8% of TM households vs. 5.6% in the previous quarter, close to its target of 8%-9% by end-2017. However, given its still relatively smallish base, we still expect its losses to continue to drag the group’s overall earnings momentum.

• Nevertheless, we do not expect any significant changes to our forecasts pending the teleconference later today. The stock currently trades at an attractive FY18F EV/EBITDA of 7x, half of SingTel’s 14x. 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 - 22 Nov 2017