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

• TM’s FY18F-19F earnings have been fine-tuned following the group’s FY17 normalised net profit of RM863mil (+2% YoY) coming in within expectations. Also within expectations was TM’s final dividend of 12.1 sen, which leads to a flat YoY FY17 DPS of 21.5 sen and translates to a payout ratio of 87%.

• The group’s 4QFY17 revenue surged 9% QoQ due to lower universal service provider (USP) grant contribution, public projects and wholesale services in the previous quarter. In tandem with the higher revenue, TM’s 4QFY17 normalised EBITDA rose 4% QoQ to RM922mil.

• This translated to a 9% increase in 4QFY17 normalised net profit of RM222mil, supported by a positive minority tax charge arising from webe digital losses and partly offset by a 4ppt increase in effective tax rate to 37% due to non-deductibility of unifi Mobile losses.

• However, TM’s flat FY17 revenue growth of only 0.2% missed management’s earlier guidance of 3.5%-4%. This stems from lower IRU sales, discounts on wholesale customers and a 4.5% decline in voice revenue. Nevertheless, we maintain TM’s FY18F-FY20F revenue growth assumptions of 3.1%-3.7% vs. management’s FY18F target of 3.5%-4% for now.

• For FY17, the group delivered a flat normalised EBIT of RM1,187mil, as targeted in 4QFY16. For FY18F, management again expects a flat EBIT as higher depreciation from an expanding network offset a more robust revenue target.

• Capex/revenue ramped up to 35% in 4QFY17 from 11.9% in 1QFY17, which led to an overall 22.8% FY17. This is lower than management’s revised guidance of a high 20% range due to internal project re-prioritisation.

• Recruitment rates for new unifi customers continue to grow, rising 10% QoQ and 19% YoY to 1.1mil. However, Streamyx has decreased by 6% QoQ and 15% YoY to 1.3mil due to migration to unifi and other fixed and wireless broadband providers. Meanwhile, unifi ARPUs slid sequentially by RM2/month QoQ to RM197/month while Streamyx slipped by RM1/month to RM90/month.

• unifi Mobile has achieved a penetration rate of 9.8% of TM households vs. 8% in the previous quarter, slightly exceeding its earlier target of 8%-9% by end-2017. However, given its still smallish base, we expect its losses to continue to drag the group’s overall earnings momentum.

• The stock currently trades at an attractive FY18F EV/EBITDA of 8x, 43% below 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 - 28 Feb 2018