- We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-derived fair value of RM5.40/share following the release of its 9M13 result.

- While revenue and EBITDA were in line, accounting for 73%-74% of estimates, bottomline was slightly ahead at 81% of our estimate and 87% of consensus. This was mainly due to lower effective tax rates arising from HSBB tax incentives, which ended in mid-September. Revenues were up by 10% YoY driven mainly by non-voice (internet: +14% YoY, data: +17% YoY).

- The recently introduced high speed Streamyx broadband in non-Unifi areas (4mbps and 8mbps packages) is seeing traction. The churn in Streamyx subscribers in at least the past 24 months seems to have been arrested in 3Q13 (net add of 1,000 subs). Streamyx ARPU increased to RM83 from an average of RM80 in the past 6 quarters.

- We see HSBB via Streamyx as a strategic move to get around competition given that the infrastructure for fibrebased HSBB is shared with competitors via wholesale agreements. High-speed Streamyx allows TM to meet fresh demand for HSBB in non-Unifi areas, which is something that competitors lack.

- Unifi ARPU also increased to RM183 (from an average RM179 in 1H13) driven by an increased take-up of HyppTV. IPTV revenue (+54% YoY) was driven by a larger Unifi subs base and increased take-up of HyppTV premium channels (recently introduced sports packages in Aug and HyppTV to Streamyx in July). However, content cost is likely to pick up in 4Q13 onwards (full-blown impact of new sports contents), which may pressure margins.

- Additionally, TM saw improved margins in the 9M13 period due to slower Unifi net additions (lower subscriber acquisition cost), but this could pick up once HSBB 2 takes off. Given that these would be less prime areas compared to the 1st phase, we think maintaining Unifi takeup rates (42% currently) in the 2nd phase will be more challenging.

- However, Phase 2 HSBB may not necessarily mean usage of high cost fibre as HSBB is defined as speeds of at least 4mbps, which certain parts of TM’s Streamyx’s network can deliver.

- We have made housekeeping adjustments to our projections to incorporate lower tax rates for FY13F, but our far value remains unchanged at RM5.40/share. Nonetheless, at current share price levels, dividend yield of 5.2% is looking increasingly attractive.

Source: AmeSecurities