Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) but with a lower fair value of RM6.20/share by reducing FY18F EV/EBITDA from 9x to 8x, which is at a 40% discount to Singapore Telecommunications Ltd’s (SingTel) 14x.

• TM’s FY18F-20F earnings have been cut by 4%-9% as its 1QFY18 normalised net profit disappointed, halving QoQ and YoY to RM105mil. This accounts for only 12% of our earlier FY18 earnings and street’s vs. 24%-27% for 1QFY15-1QFY17 in the respective years. Our lower forecasts stem from a more conservative FY18F-FY20F revenue growth of 1.5%-2% (from an earlier 3.1%-3.7%) vs. management’s unchanged FY18F guidance of 3.5%-4% and flat EBIT.

• Management’s more bullish outlook is premised on expectations of an acceleration in revenue momentum underpinned by its focus on upgrading customers to quadruple-play (phone, broadband, mobile and TV) services for households, together with increased public/enterprise projects, new data centre services and sales of submarine connectivity via indefeasible rights of use (IRU).

• The group did not declare any first interim dividend, as expected. However, management maintains its FY18F guidance of a flat YoY absolute dividend, which translates to a payout of over 90%.

• The group’s 1QFY18 revenue fell 11% QoQ due to a sharp contraction in voice, data and other telco services, partly mitigated by increased internet revenue. The largest QoQ declines stemmed from TM One and TM Global, which decreased by 17% and 22% respectively, from lower universal service provision revenue, lower government and enterprise projects amid the absence of IRU sales.

• In tandem with the lower revenue, TM’s 1QFY18 normalised EBITDA slipped 16% QoQ to RM778mil. Together with the QoQ doubling of effective tax rate to 69% due to webe digital losses, this translated to the halving of 4QFY17 normalised net profit.

• Recruitment rates for new unifi customers continue to grow, rising 5% QoQ and 20% YoY to 1.2mil. However, Streamyx shrank by 6% QoQ and 19% YoY to 1.1mil due to migration to unifi and other fixed and wireless broadband providers. Meanwhile, unifi ARPUs slid sequentially by RM3/month QoQ to RM194/month as TM positions to accommodate the government’s drive to “double the speed for half the price”.

• As unifi Mobile continues to post losses which are envisioned to turn around over the next 3 years, it will further drag the group’s overall earnings momentum. Also, capex/revenue is expected to rise, after sliding to 11.5% in 1QFY18 from 35% in 4QFY17, given management’s unchanged FY18F guidance of 25%-30%.

• 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 as the need for a potential re-merger with Axiata Group is re-accentuated by its weak 1QFY18 results.

Source: AmInvest Research - 22 May 2018