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 following the analyst briefing yesterday with group CEO Datuk Seri Shazalli Ramly, group deputy CEO Datuk Bazlan Osman and group CFO Nor Fadhilah Mohd Ali. The salient points of the meeting are:
• Management plans to sustain EBITDA growth by driving TM’s data management services under TM Global, which has the best margin of 22% vs. 19% for TM One and 2% for UniFi. This will be partly supported by the recently launched RM300mil Iskandar Puteri Data Centre to cater to cloud hosting and Internet of Things requirements. TM One also plans to offer call centres and smart services deployment in Iskandar Malaysia to provide security, city-wide services, energy and facilities management. TM One, which registered a 4% YoY decline in 9MFY17, accounted for 60% of TM’s operating profit. Nevertheless, stronger revenue growth from UniFi and TM Global is envisioned to more than offset the decline in TM One.
• Data revenue growth is expected to remain positive following the recent launch of Sistem Kabel Rakyat 1Malaysia (SKR1M) submarine cable system, which should drive the sale of indefeasible rights of use. This over 3,800km cable system lands in Kuantan, Mersing, Kuching, Bintulu, Miri and Kota Kinabalu.

• The group plans to more aggressively market UniFi to penetrate households in landed, commercial and high-rise buildings. As we have reported, the group has reintroduced UniFi Lite packages earlier this month at 10Mbps, which are more affordable to the mid-income group. UniFi subscriber growth of 55,000 in 3QFY17 was the highest since 2012, partly driven by the migration of its Streamyx base.

• webe brand will be discarded soon under unifi mobile and TM Wifi to wifi@unifi, as part of the group’s “Perfexe 10” convergence and digitalisation strategy. The group has launched “i-foundit!”, an app that enables access to TM’s 5,800 national hotspots together with unifi ebiz for small medium enterprises.

• TM maintained its FY17F revenue growth guidance of 3.5%-4% even though it seems challenging against only 0.7% achieved in 9MFY17.

• Management has not provided details in its bid for the 700MHz spectrum other than indicating that TM remains interested.

• 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 - 23 Nov 2017