Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with a higher fair value of RM4.40/share (from an earlier RM3.80/share) by raising FY19F EV/EBITDA from 6x to 6.5x, which is at 2.5 SD below its 3-year average of 8x (See Exhibit 1).

• We are relieved on the abortion of the Memorandum of Understanding (MoU) between TM and Tenaga Nasional to jointly develop an implementation plan to deliver the government’s Nationwide Fiberisation Plan (NFP).

• Recall that this collaboration was intended to capitalise on the combined strength of both company’s nationwide infrastructure and proven expertise, taking advantage of synergies to develop the most efficient cost structure, and accelerate the fibre broadband network reach.

• This was the previous and current government’s aspirations to drive the country’s digitalisation under both the NFP as well as TM’s own RM11bil High Speed Broadband (HSBB) project, by tapping into the sharing of resources with Tenaga such as the existing fibre network, control centres, other transmission systems and building facilities of both companies.

• There were speculations that a second fixed broadband network player called Broadnet Network could be deployed on Tenaga Nasional’s electricity transmission lines under the NFP programme. The last mile NFP fibrerisation capex was reported to cost up to RM10bil.

• In our view, this is a positive development for TM as the investment returns of the NFP programme is likely to be unattractive given that the target of Broadnet was untapped markets which could be low in population density.

• From our recent meeting with the MCMC, we understand that the current broadband penetration rate of 85% appears poised to reach the 95% target envisioned under the 11th Malaysia Plan. Hence, TM’s High Speed Broadband (HSBB), HSBB2 and Suburban Broadband (SUBB) programmes already appear to be reaching the government’s goal. However, there remains a coverage gap in remote or under-served areas which will require alternative connectivity solutions.

• In our view, a second fibre operator will be a duplication of resources and introduction of another competitor which will further depress broadband pricing packages. TM has recently announced more affordable propositions at RM79/month (with a quota of 60GB) for households earning below RM4,500/month while boosting the speeds of its existing plans. Recall that Unifi aims to raise the speed of its RM139/month package from 30Mbps to 300Mbps while its RM329/month plan from 100Mbps to 800Mbps.

• The stock currently trades at an attractive FY18F EV/EBITDA of 6x, half of SingTel’s 12x. We continue to expect the group’s convergence strategy to offer quad play services to eventually lead the path towards sector consolidation.

Source: AmInvest Research - 24 Jul 2018