Highlights

• TM is supportive of government’s initiatives in Budget 2017: - Fixed telcos will offer services at a higher speed for the same price in starting Jan 2017; - Speed will be doubled with 50% price reduction by 2019; - Public universities to be equipped with 100Mbps link; and - MCMC will provide RM1bn to ensure the coverage and quality of broadband nationwide reaches up to 20Mbps.

• Only 500k (55%) out of existing 900k UniFi subs are eligible to enjoy this upgrade due to technical limitations while the rest were recently upgraded and SMEs which are not entitled.

• In the medium term, TM expects better quality of service will lead to improvements in retention and credit management, mitigating any rise in costs, including CPE and data backbone upgrades. Thus, FY16 headline KPIs are maintained.

• View this as an opportunity for Streamyx users to upgrade to UniFi while enticing new subs.

• Employing new tech to overcome the challenges in fiberizing high rise, including vectoring / G.Fast or even LTE-A (CA).

• As for price reduction, TM clarified that this is only applicable on the connectivity element and projected to be cushioned by revenue gain from digital services, such as security, content, applications, etc.

• While requirements remain vague, TM to engage MCMC and clarify further on the RM1bn funding.

Comments

• Remain negative despite TM guided these initiatives are BAU but just got accelerated. However, overall impact is not as large as initially anticipated due to eligibility and price reduction component.

• Steep price reduction may potentially erode Streamyx’s value (currently priced lowest at RM110/month) and encourage existing UniFi subs to down trade their packages.

Catalyst

• Earnings uplift from HSBB and ICT-BPO.

• LTE node fiberization.

Risks

• Appreciation of USD, regulatory risks, irrational competition and acceleration of global bandwidth price erosion.

Forecasts

• Tweaked projections with slower growth and higher costs assumptions which in turn led to 10.6% and 21.3% cut in FY16-17 EPS, respectively.

Rating

HOLD ↔, TP: RM6.12 ↓

• Due to its monopoly status in Malaysian fixed telco sector, regulatory risk is higher while government funding further lowers its bargaining power. Convergence is a visionary ambition but webe will drag in the medium term. Dividend policy of at least RM700m dividend cap on the downside.

Valuation

• Reiterate HOLD although DDM-derived TP has been lowered by 11.1% from RM6.89 to RM6.12 as we rolled forward our valuations while reflecting the downward revision, based on unchanged WACC of 5.8% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 25 Oct 2016