Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with unchanged forecasts and fair value of RM4.90/share based on an FY18F EV/EBITDA of 5x, which is 0.4x of Singapore Telecommunications Ltd’s (SingTel) 14x.

• Fitch Ratings has downgraded TM’s credit outlook to negative from stable while reaffirming its long-term foreign-currency issuer default rating and senior unsecured rating at “A-” due to EBITDA pressure, continuing high capex/dividend commitments, and the government’s plan to lower fixed broadband prices by 25% by the end of this year.

• TM, which had met the Ministry of Communications & Multimedia Malaysia and the Malaysian Communications & Multimedia Commission (MCMC) last week, plans to announce details about its initiatives on affordable broadband services at higher speed within the next quarter.

• It also reiterated its support of the government’s aspiration regarding affordable broadband services at higher speed to increase its competitiveness. Recall that the plan to reduce broadband pricing stems from the Mandatory Standard on Access pricing (MSAP), which sets the wholesale price ceiling that can be charged by service providers.

• One option to mitigate the impact would be to adjust the permutation of price to speed offerings, as TM’s price/speed is much higher compared to Time dotCom’s. TM’s lowest unifi monthly package of RM129 for speed of 10Mbps translates to RM12.90/Mbps, 8.7x compared to Time dotCom’s RM1.49/Mbps (RM149 at 100Mbps).

• 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.

• Under the worst case scenario, 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 believe the government will be receptive to a lower price to speed offerings as a drastic revenue cut could derail the group’s capex rollout programme under the High-Speed Broadband 2 drive to connect suburban and rural areas, impeding plans to provide internet access throughout Malaysia. We highlight that TM is Malaysia’s sole national operator of fixed telephony and broadband while Time dotCom provides fibre-optic connectivity limited to high-rise, population-dense and commercial centres.

• In our view, the worsening credit outlook and revenue pressures will eventually lead the path towards sector consolidation and a potential re-merger with Axiata Group. The stock currently trades at an attractive FY18F EV/EBITDA of 5x, 0.4x of SingTel’s 14x.

Source: AmInvest Research - 26 Jun 2018