Investment Highlights

• We have downgraded our call on Telekom Malaysia (TM) to HOLD from BUY with a lower fair value of RM3.80/share (from an earlier RM4.40/share) with an FY19F EV/EBITDA of 6x which is at 3 SDs below its 3-year average of 8x (See Exhibit 1) given the government’s agenda to lower broadband prices amid rising competition.

• We have cut FY18F-FY20F earnings by 4%-7% on lower average revenue per user (ARPU) assumptions for TM’s unifi segment.

• The media has reported Communications and Multimedia Minister Gobind Singh Deo as saying that TM’s carriageway ducts will soon be opened for the access of other telco players as part of the government’s strategy to introduce more competition in the fixed broadband market.

• Additionally, Tenaga Nasional’s 12,600km fibre optic network has also been requested to be opened to other operators. While the mandatory standard access pricing structure for the High Speed Broadband usage has not been announced yet, it is likely to be reduced to incentivise third parties to deliver last-mile connectivity.

• Recall that the memorandum of understanding (MoU) between TM and Tenaga to jointly develop an implementation plan to deliver the government’s Nationwide Fiberisation Plan (NFP) was aborted.

• 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. Currently, Tenaga’s fibre network is primarily used for supervisory control and data acquisition.

• 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.

• 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. 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 a depressed FY18F EV/EBITDA of 6x, half of SingTel’s 12x due to uncertainties on the impact on its broadband ARPUs from the rising tide of competition and government-mandated price cuts.

Source: AmInvest Research - 3 Aug 2018