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 narrows down the valuation differential.

• TM and Tenaga Nasional signed a memorandum of understanding (MoU) yesterday to jointly develop an implementation plan for the government’s Nationwide Fiberisation Plan (NFP), which will be subject to the finalisation of commercial terms with a definitive agreement.

• This collaboration will capitalise on the combined strength of both company’s nationwide infrastructure and proven expertise, riding on synergies to develop the most efficient cost structure, which will accelerate the fibre broadband network reach.

• We understand that this may involve tapping into the sharing of resources such as existing fibre network, control centres, other transmission systems and building facilities of both companies.

• This is in line with the government’s aspirations to drive the country’s digitalisation under both the NFP as well as TM’s own RM11bil High Speed Broadband (HSBB) project.

• Besides ensuring the safety and security of the nation’s strategic and critical infrastructure, the proposed network will also retain the existing open access participation of industry players to promote private sector competition in retail broadband.

• At this juncture, we are not certain if this involves the earlier reports of a second fixed broadband network player called Broadnet Network, which could be deployed on Tenaga Nasional’s electricity transmission lines. This was reported to be also under the NFP programme.

• Nevertheless, we expect that TM’s expertise in rolling out HSBB and now HSBB2 to the suburban and rural areas may expedite this second proposed fibre rollout to underserved segments and markets.

• We could envision the collaboration to be complementary by leveraging TM’s already established fibre system to provide connectivity to Broadnet’s future network.

• Hence, the potential value erosion arising from a price war between two fixed line players may be mitigated. Additionally, given that Broadnet’s focus will be towards untapped areas, the potential return on investment may be lower compared to HSBB, which was initially targeted at high density urban centres.

• 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 - 17 Jan 2018