- We re-initiate our coverage of Telekom Malaysia (TM) with a HOLD call at a DCF-derived fair value of RM7.20/share. This implies an FY16F EV/EBITDA of 7.5x, which is TM’s 3-year average and half of Singapore Telecommunications Ltd’s 14x currently.

- We are projecting core earnings to decline by 13% for FY15F largely due to the losses from Packet One Networks (P1), which is also contributing to TM’s higher effective tax rates. Thereafter, we have assumed growth rates of 10%-15% annually for data and for internet to underpin FY16F-FY17F earnings growth of 13%-19%. For FY15F-FY16F, our net profit forecasts are 6-8% below current street estimates.

- We expect P1 losses to continue to drag the group’s overall earnings momentum next year, as any new launches could mean higher start-up costs and a gestation period of at least a year. Additionally, we prefer to adopt a cautious stance to gauge how customers respond to the promotional launch of more costly Unifi packages under a weak economic environment and the rising costs of living.

- TM’s 9MFY15 results came in below street estimates, with normalised profit (stripping out forex losses) of RM591mil accounting for 66% of consensus’ RM892mil. The group’s 3QFY15 normalised net profit decreased by 9% to RM200mil despite a 3% increase in revenue largely from a high effective tax rate of 48% in 3QFY15 due to P1’s losses not being utilised to offset the group’s taxable profits.

- On a QoQ comparison, TM’s data revenue growth of 12% outstripped the 2% for both voice and internet, largely due to lumpy international leased, IRU and Ethernet services at the Global and Wholesale business segment.

- The recruitment for new Unifi customers has slowed down to only 11,000 in 3QFY15 from 25,000 per quarter in 1QFY15- 2QFY15. Besides the impact of GST, the rising cost of living and weak economic outlook, the recent launch of more pricey broadband packages albeit at much faster download speeds may generate only lukewarm response.

- For 3QFY15, P1 registered a loss of RM54mil, contributing to a total loss of RM186mil for 9MFY15. Until the launch of P1 by the middle of next year, this LTE service is likely to continue to drag TM’s earnings momentum.

- Management’s earlier FY15F EBIT guidance (which excludes HSSB 2 and SUBB) of 4%-4.5% growth looks challenging given that 9MFY15 normalised level slid 8%. For the HSBB2 and SUBB projects targeting secondary cities and rural areas, we expect lower internal rates of return for these capital expenditures and a longer time-frame to breakeven.

- The stock’s FY16F PE of 25x is above its 2-year average of 23x with fair dividend yields of 2%-3%.

Source: AmeSecurities Research - 27 Nov 2015