• Telekom Malaysia’s (TM) new retail broadband prices, while below our expectations, should leave ARPUs tracking within our expectations.

• Free speed upgrades for existing subscribers should mitigate the impact of price reductions, with subscribers taking the upgrades.

• Reiterate Add call, with an unchanged target price of RM6.80 (5.7x adj FY24F EV/EBITDA).

Headline Prices Lower

• On 4 Oct, TM announced lower price points for its 100/300/500Mbps pure broadband products (without content add-ons) by 23%/7%/24% to RM99/RM139/RM159.

• Existing customers on its 30/100/300/500/800Mbps plans will receive free speed upgrades for six months to 100/300/500/800Mbps.

• Customers on contract are allowed to downgrade their plans without penalty.

• In comparison, ARPU in 2Q23 was RM130/month, with the most common package, in our view, being the 100Mbps plan.

Speed Boost Mitigates ARPU Decline

• In our view, the free speed boost for six months largely protects TM’s ARPUs for FY23F and is supportive of our current estimates for TM’s FY23F/FY24F ARPUs of RM129/RM126. Our current FY25F ARPU estimate is RM125; we believe any downside risk to this will be mitigated by the potential lift in subscriber numbers.

• The free speed upgrade is important, in our view, as it allows subscribers to experience faster speeds, potentially making it easier for them to consider an upgrade after the end of the free upgrade period.

• We note that the experience in neighbouring countries, e.g. Singapore, suggests that fibre broadband ARPUs can hold and even rise if consumers see the utility of the higher speed product. We also note that despite a 56% decline in retail prices of the most common plan in 2018, i.e. 30Mbps with content and phone line, to RM79/month (broadband only), Unifi ARPUs declined by a milder 26% in 2018-2020 to RM149/month.

• For asset owners such as Telekom Malaysia, the cost of higher speeds is incremental as the key cost elements are fixed in nature, i.e. cost of installing physical infrastructure.

Reiterate Add, With a RM6.80 Target Price

• We see the removal of the uncertainty over retail fibre broadband price points as a potential re-rating catalyst for TM, as we believe investors have been preparing for a worst-case outcome similar to 2018, when price points saw greater reduction.

• Key downside risk would be steeper price cuts by competitors resulting in lower ARPUs.

• Our TP of RM6.80 is based on an FY24F adj. EV/EBITDA of 5.7x, reflecting +1 s.d. of TM’s post-2017 EV/EBITDA multiples.

Source: CGS-CIMB Research - 5 Oct 2023