Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with a lower fair value of RM3.80/share (formerly RM4.90/share), based on a reducing FY18F EV/EBITDA from 7x to 6x, which is half of Singapore Telecommunications Ltd’s (SingTel) 12x.

• We have also cut FY18F-FY19F earnings by 10%-14% on reduced revenue and capex assumptions following TM’s lowered 2018 key performance indicators (KPI) as follows:

• Revenue growth of -1% to flat vs. an earlier increase of 3.5%- 4%;

• EBIT of RM1bil, which translates to a YoY drop of 15.8% vs. an earlier flat YoY guidance; and

• Reduced capex of 20%-22% of revenue from an earlier guidance of high 20s by reprioritising network rollouts and optimising on existing assets.

• In tandem with the government’s agenda to reduce broadband prices, entry level unifi packages priced below RM100/month with data speeds of 30Mbps (current package for this speed is RM179/month) will be launched beginning July 15 for targeted lower income groups in the B40 segment with household income below RM3K, which comprise a minor portion of the group’s existing base of 2mil broadband customers.

• Currently, the lowest unifi lite plan starts at RM129/month at speeds of up to 10Mbps. Also, TM will r-launch its unlimited unifi mobile postpaid plan, which was discontinued earlier this year.

• Beginning 15 August 2018, TM will offer unifi turbo plans which will more than double current broadband speed while gradually upgrading the speeds of existing customers at no extra cost. There will also be a special package upgrade for pre-unifi (formerly Streamyx) customers in unifi areas nationwide. Currently, these plans start at RM110/month with speeds of 1Mbps.

• The ARPU impact of the new pricing packages could be largely mitigated as only the lower income group will be offered the plans below RM100/month, while the rest of TM’s customers will enjoy doubled speeds at the same price points, as we had guided in our earlier reports.

• However, margin pressures remain with wholesale pricing expected to decrease as the Mandatory Standard on Access Pricing will be reduced for other service providers, partly mitigated by its own access to other third party networks.

• Under its fourth wave of the “Performance Improvement Programme”, TM will focus on raising revenue, optimise cost structure, digitalise and improve productivity to meet the broadband price cuts, intense competition and regulatory pressures.

• In our view, TM’s 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 6x, half of SingTel’s 12x.

Source: AmInvest Research - 4 Jul 2018