Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) but with a lower fair value of RM4.90/share (from an earlier RM5.30/share) with the reduction of FY18F EV/EBITDA from 8x to 7x, which is half of Singapore Telecommunications Ltd’s (SingTel) 14x.

• Our FY18F-FY20F earnings have also been cut by 9%-17% on lower assumptions for the group’s average revenue per user (ARPU) for its fixed line and broadband divisions.

• According to The Star, Communications and Multimedia Minister Gobind Singh Deo said that fixed broadband prices are expected to drop by at least 25% by year-end as part of the Pakatan Harapan government’s election pledge.

• This stems from the Mandatory Standard on Access Pricing (MSAP), which sets the wholesale price ceiling that can be charged by service providers.

• As TM had appealed to the Malaysian Communications and Multimedia Commission to reconsider the pricing implementation after a review last year, the reduced price did not take effect in January this year. Hence, the MSAP would be backdated to 1 January 2018 from 8 June 2018.

• Gobind also said that there could be possible rebates for payments made since January this year.

• Based on unifi’s 1.2mil customers and ARPU of RM194/month in 1QFY18, we estimate that this division’s annualised revenue could reach RM2.7bil, excluding Streamyx customers which could account for another RM1.2bil.

• A 25% reduction in unifi revenue alone could potentially wipe out almost 90% of TM’s FY19F earnings. Including a similar reduction in Streamyx revenue, it will translate to a slight loss for TM.

• Hence, we expect TM to continue appealing to the government to reconsider its decision as such a drastic cut will derail the group’s capex rollout programme under the High-Speed Broadband 2 drive to connect suburban and rural areas.

• This will also hinder plans to provide internet access throughout Malaysia, which Gobind indicated may be recognised as a basic human right by the government.

• We continue to expect the national agenda to reduce broadband prices under the “double the speed for half the price” campaign together with TM’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.

• The stock currently trades at an attractive FY18F EV/EBITDA of 6x, 0.4x of SingTel’s 14x.

Source: AmInvest Research - 21 Jun 2018