TM revised its headline KPI in view of the challenging market outlook. CAPEX guidance is also lowered to maintain minimum distribution as per divided policy. New product portfolios, including unlimited postpaid mobile will be introduced to satisfy government’s broadband affordability goal. We raise earnings forecasts mainly due to lower CAPEX (lower depreciation). Reiterate HOLD with higher TP of RM3.21.

Challenging outlook. TM hosted a conference call yesterday addressing the recent regulatory concerns as well as market dynamics. It expects the headwinds to persist this year which include:

1. Potential broadband price revision;

2. Intensifying competition;

3. Regulatory changes; and

4. Increasing costs.

Thus, FY18 KPIs Are Revised Lower.

1. Revenue growth of -1% to flat (previously 3.5-4.0%);

2. EBIT of circa RM1bn (previously RM1.2bn); and

3. Customer satisfaction measure of 72 (previously 74) but still higher than global average of 68;

CAPEX guidance. Revised lower to 20-22% of revenue from high-20% guided earlier this year. Investments will be centred on mobile (LTE) and twin core data centre (expected to complete by 3Q18). TM plans to taper down the outlay to expand fibre reach, instead focusing on sweating assets and also be an access seeker at locations which TM has no presence.

Government’s criteria. Apart from price per unit (Mbps), the regulator also uses entry price as the parameter to benchmark against regional peers to gage broadband affordability. As such, TM has also shared some product roadmaps in order to meet those aspirations:

• Affordable entry level unifi @ 30Mbps (without HyppTV and voice) for B40 households for less than RM100 per month;
• unifi “turbo” plans to more than double existing plans without additional costs;
• Special upgrade for 323k pre-unifi (Streamyx) subscribers; and
• Re-launching of unlimited postpaid mobile only to fixed customers.

PIP2018. Performance Improvement Programme 2018 is introduced to achieve KPIs with 4 main pillars, namely revenue uplift, sustain profitability, improve cash flow and increase productivity. A dedicated PMO team has been established to closely track and monitor the execution.

View. We are positive that TM lowers CAPEX guidance in order to sustain the committed minimum annual dividend payout of RM700m which currently yields 5.6%.

Forecast. Tweak model based on revised KPI and CAPEX guidance. In turn, FY18- 20 EPS were adjusted by -5%, +18% and +7%, respectively.

Reiterate HOLD with higher DDM-derived TP of RM3.21 using WACC 6.3% and TG of 0.5%. 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 payout caps the downside.

Source: Hong Leong Investment Bank Research - 4 Jul 2018