Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with a lower fair value of RM3.30/share (from RM3.80/share) based on an FY19F EV/EBITDA of 5.5x. This is 3SDs below its 3-year average of 8x given the intensifying broadband competition and implementation of the Mandatory Standard on Access Pricing (MSAP), which has reduced wholesale prices for third-party operators to access TM’s high-speed broadband network.

• We have lowered TM’s FY18F-FY20F earnings by 3%-8% as its 1HFY18 normalised net profit of RM261mil accounted for 40% of our earlier FY18 earnings and street’s vs. 44%-51% for 1HFY15- 1HFY17 in the respective years. Our forecasts are now 9%-14% below consensus.

• While our existing FY18F assumptions are already in line with management’s lowered guidance of a revenue change of -1% to flat (vs. an earlier growth of 3.5%-4%) and EBITDA decline of 16% to RM1bil (vs. flat YoY previously), our lower earnings forecasts stem from adjustments to direct costs and effective tax rates.

• We have also reduced TM’s FY18F capex/revenue assumption from 22% to 20% following management’s guidance of 19%-20%, down from 20%-22%, by optimising TM’s existing network infrastructure and focusing on cost efficiencies. The group did not declare any first interim dividend with management yet to change its FY18F guidance of a flat YoY absolute dividend vs. our 26% DPS reduction.

• In 1HFY18, TM has provided for RM88mil in revenue provision from the implementation of the MSAP, which accounted for 18% of 1HFY17 pretax profit, generally within the expectations in our update on 14 August 2018. Coupled with lower income from universal service provision and government/enterprise projects, its 1HFY18 revenue slid 3% YoY and led to normalised earnings dropping by 40% YoY.

• Even with the MSAP impact, the group’s 2QFY18 revenue still rose 3% QoQ as higher contributions from TM One (+10%) and TM Global (+3%) offset the decline in Unifi (-1%). The higher margins from Unifi and TM Global, together with a halving in webe-driven effective tax rate, drove TM’s 2QFY18 normalised earnings 48% higher QoQ.

• Recruitment rates for new unifi customers continue to grow, rising 3% QoQ and 21% YoY to 1.2mil. However, Streamyx shrank by 4% QoQ and 20% YoY to 1.1mil due to migration to unifi and other fixed and wireless broadband providers. With 2QFY18 unifi ARPUs slipping by RM3/month QoQ to RM191/month, we expect further broadband pricing erosion as TM has now made the new RM79/month plan (with a 60GB data cap) available to all via digital subscription, which was earlier only offered to the B40 segment with household income of RM4,500. However, this could be partly mitigated as management has indicated that new subscribers are mostly signing up for standard packages with unlimited data.

• The stock currently trades at a depressed FY18F EV/EBITDA of 6x, well below its 3-year average of 8x due to the rising tide of competition and government-mandated wholesale price cuts.

Source: AmInvest Research - 30 Aug 2018