Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with unchanged forecasts and fair value of RM5.30/share based on FY19F EV/EBITDA of 7x, which is half of Singapore Telecommunications Ltd’s (SingTel) 14x. Our FY18F/FY19F/ FY20F earnings are 15%/12%/5% above consensus respectively.

• TM’s expansion into Dubai is unlikely to have any significant near-term impact to the group’s earnings prospects. This is part of the group’s ongoing strategy under TM Global to position Malaysia as the gateway into the ASEAN region, offering voice, data and backhaul services via submarine cable connectivity.

• As the office will be based in Dubai Multi Commodities Centre, a free trade zone and an international trade hub of the United Arab Emirates, it will assume the role of TM’s regional sales in the Middle East, focusing on the UAE, Qatar, Bahrain, Kuwait and Oman.

• TM Global, which accounted for 47% of the group’s 1QFY18 operating profit, is TM’s global and wholesale business arm serving global carriers and local operators, focusing on content localisation to minimise outbound bandwidth and offer easier access for businesses at lower prices.

• For TM Global, sales of indefeasible rights of use (IRU) for its submarine cable connectivity remain a key component of its operations, with its investments in 20 submarine cables covering fibre routes in excess of 190,000km. Last year, 3 new ASEAN submarine networks - Malaysia-Cambodia-Thailand (MCT), Nusantara Gateway (NuGate) and Sistem Kabel Rakyat 1Malaysia (SKR1M) - were deployed. TM also has point of presence (PoP) in Marseilles, France for connectivity to Europe.

• In 1QFY18, TM Global’s revenue fell 6% YoY due to lower IRU sales, while operating profit rose at a slight 4% YoY. Within TM’s 3 main core divisions, TM Global delivered the highest operating margins, averaging at 25% over the past 4 quarters vs. 18% for TM One and 2% for Unifi.

• Meanwhile, recruitment rates for new unifi customers continue to grow, rising 5% QoQ and 20% YoY to 1.2mil in 1QFY18. However, Streamyx shrank by 6% QoQ and 19% YoY to 1.1mil due to migration to unifi and other fixed and wireless broadband providers.

• In 1QFY18, 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”. This has led to TM’s share price weakness over the past few weeks.

• However, 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 remerger with Axiata Group is re-accentuated by its recent weak 1QFY18 results. The stock currently trades at an attractive FY18F EV/EBITDA of 6x, 0.4x SingTel’s 14x.

Source: AmInvest Research - 8 Jun 2018