Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with unchanged forecasts and fair value of RM3.80/share based on an FY19F EV/EBITDA of 6x which is 3 SDs below its 3-year average of 8x given the government’s agenda to lower broadband prices amid rising competition.

• According to The Malaysian Reserve, TM has appealed to the government to delay and revise the implementation of the Mandatory Standard on Access Pricing (MSAP), which will reduce the wholesale prices for third-party operators to access its high-speed broadband (HSBB) network.

• The MSAP was announced last month as the government seeks to make broadband access cheaper under the Pakatan Harapan government. Recall that Communications and Multimedia Minister Gobind Singh Deo said the Malaysian Communications and Multimedia Commission (MCMC) has implemented the MSAP since June 8, which would result in reductions in fixed broadband prices.

• The MSAP stipulates the ceiling wholesale prices that can be charged by service providers for the facilities and services used by retail telco players. It was slated for enforcement on Jan 1, 2018, but was placed on hold after an earlier appeal by TM to revise its pricing components.

• The MCMC had stipulated July 31 as the extended deadline to complete all access agreements based on the new MSAP prices. The access agreement has to comply with the MCMC’s Mandatory Standards on Access (MSA) and MSAP.

• The telcos, however, have yet to receive any access agreement from TM that is compliant with the MSA and MSAP. Instead, the report said that an official appeal has been made to the Prime Minister’s Office and the Ministry of Finance to revoke the MSAP implementation. We are not surprised by this development as such reductions in charges in wholesale pricing will significantly erode the company’s earnings, as mentioned in our past reports.

• In 1QFY18, TM Global, which offers domestic and international wholesale connectivity, accounted for 15% of group revenue while contributing a much higher operating profit share of 47%. Assuming that domestic High Speed Broadband wholesale account for 20% of TM Global’s revenue, we estimate that a 50% cut in wholesale rates could reduce TM’s FY19F earnings by 20%.

• In our view, there is a possibility that the government may allow a postponement in the MSAP implementation as an erosion in TM’s earnings could significantly reduce its dividend payout to Khazanah while delaying the HSBB2 and Suburban Broadband rollouts, hindering the MCMC’s aim of providing broadband coverage nationwide.

• 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 - 14 Aug 2018