During this MCO period, strong wholesale data demand is expected to partly cushion any shortcomings from retail and Others. TM’s business is perceived to be rather resilient even in this epidemic and its fibre assets, akin to ventilator for Covid-19 patient, are helping every organizations and individuals to breathe through their grounded lives from work to entertainment. Leveraging on its extensive fibre reach, TM is definitely a prime beneficiary of 5G rollout. With more clarity in guidance, we reduce our forecasts which resulted in lower DCF derived TP of RM4.72. Maintain BUY.

MCO initiatives. (1) Boosted mobile data quota to 1TB, fixed’s is already unlimited; (2) new subs will get free 7-day unlimited pass; (3) free unifi TV channels; and (4) VOD 20% discount. Apart from CSR, we expect offerings to promote branding, stimulate stickiness and entice change in consumption behaviour (especially for TV) but unlikely to inflate TM’s cost structure. All TMpoints are closed. As such, customer service and payments are diverted to online channels and contact centre only.

Wholesale. Surge in data demand from (1) international - links between US, SEA and Europe were expanded in the first 2 weeks of MCO; (2) domestic - cellcos to beef up backhaul transmission to support the spikes in traffic. MCMC recently shared that nationwide internet traffic jumped 24% in the first week of the MCO and a further increase of 9% in the following week.

TM One. Amid lockdown, TM has granted some cash-strapped SMEs to defer their payments on a case-by-case basis. Till now, there is no discount offered (no ARPU dilution) but may evaluate this option sine MCO is extended. There is no such concern from the large clients which comprise of government, banks, MNCs, etc. Data centre, especially Iskandar Puteri Data Centre, begins to see some spill over effects from Singapore with good visibility.

Retail. All installation, network and service restoration activities at customer premises (except government agencies, hospitals and clinics) are postponed and will only resume after MCO. However, new unifi subscriptions continue to accumulate via online portal. TM has strategized to address this backlog and is confident to complete those installations soonest possible (within 2-3 days). Broadband (HSBB, HSBB2 and SUBB) home-pass stands at 3.5m ports now.

Regulatory. Despite the new government has committed to carry on with the existing 5G and NFCP roadmaps, the 5G spectrum tender is likely to be delayed. To recap, it was initially planned to complete the tender in 2Q20 and commercial launch in 3Q20. Nonetheless, TM remains confident that it is the lead contender in 5G race leveraging on its most extensive fibre network in the nation.

Debt and dividend. USD-denominated debt amounted to USD575m, out of which 35% (USD200m) is hedged. No concern despite unfavourable forex as those borrowings are long dated with expiries in 2025 and 2026. Dividend policy stays at 40- 60% of reported PATAMI. No pressure from government to divvy more as it needs to sustain capex requirements.

FY20 capex. Unchanged at low-to-mid 20% of revenue (circa RM2.5bn vs. FY19’s RM1.4bn). Majority of the capex will be allocated to expand fibre network aggressively targeting high yield areas. Some capex (circa RM10m) is accelerated in order to cater for the high demand during MCO.

FY20 guidance. (1) Status quo in revenue growth: low-to-mid single digit decline. Although ARPU has stabilized lately, TM prudently expects more erosions post-price revisions towards end of FY19. Other revenues may see downward pressure coming from KL Tower ticketing and MMU. (2) EBIT to range within RM1.0-1.4bn, partly due to the significantly higher capex which usually entails higher costs as well (expenses that cannot be capitalized). On the bright side, TM is in the midst of 3-year cost saving journey and believe more can done to through contracts renegotiations and manpower mobilization (more focus on sales and post-sales).

Forecast. Tweak our revenue assumptions by imputing slower unifi subs acquisition during MCO, moderated ARPU trend and weaker contribution from Other revenues. In turn, FY20-21 EPS are revised downward by 12% and 13%, respectively.

Maintain BUY call on the back of lower DCF-derived fair value of RM4.72 (previously RM4.82) with unchanged WACC of 8% and TG of 0.5%. TM’s business is perceived to be rather resilient even in this pandemic and its fibre assets, akin to ventilator for Covid-19 patient, are helping every organizations and individuals to breathe through their confined lives from communication, work, education to entertainment. Over the long term, we are particularly positive on its cost optimization measures which are now yielding an impactful outcome. Leveraging on its extensive fibre reach, TM is definitely a prime beneficiary of 5G rollout. Other catalysts include the awards of NFCP and 5G airwaves.

Source: Hong Leong Investment Bank Research - 16 Apr 2020