Broadband Prices to Drop by at Least 25%

We reiterate our HOLD rating on TM with a lower DCF-derived price target of RM3.50 after cutting 2018-20E earnings forecasts by 12-29%, incorporating a 25% drop in broadband prices, partly cushioned by lower operating / staff costs. We are surprised at the swift execution and magnitude of the proposed broadband price cut – it should hit TM’s short term earnings; in the long-run, we believe the group has tools to cushion the blow. TM’s share price has fallen by 26% mom due to concerns over a price cut. At 25x 2019E PER / 5% 2019 dividend yield (after 25% broadband price cut), valuations look fair.

Broadband Prices to Drop by at Least 25% by Year-end

The price of broadband in Malaysia is expected to fall by at least 25% by year-end, says Communications and Multimedia Minister Gobind Singh Deo, reported Bernama. This follows the implementation of the Mandatory Standard on Access Pricing (MSAP) since June 8 this year. “The relevant parties are now in discussion on setting the wholesale price and processes which are expected to be rolled out in July or August, during which cheaper broadband packages will be offered to consumers,” he said.

The Minister Has a Strong Will to Enforce the Revised Prices

Gobind said the revised prices must be implemented and enforced. He added that the government would consider recognising access to internet as a basic human right in Malaysia, even to the extent, if practicable, a constitutional right, according to The Edge, The Malaysian Insight.

We Are Surprised With the Swift Action and Magnitude of the Cut

Lower broadband prices (wholesale or retail) will be detrimental to TM’s earnings. While the government’s intention to lower broadband prices is well articulated, we are still surprised at the swift implementation (starting July/Aug, in effect by year-end), magnitude of price cut (by at least 25%) and strong commitment by the ministry. Similarly, we believe that consensus (Fig 2) has yet to reflect a significant reduction in broadband prices.

Short Term Pain; in the Long Run, TM Has Tools to Cushion the Blow

Management has yet to outline TM’s strategy to mitigate the impact of falling broadband prices. In the immediate term, the impact of revenue decline will be significant, in view of TM’s high fixed (manpower, depreciation & amortisation) and financial costs. In the long run, we expect management to undertake various initiatives to tackle the changing business environment (i.e. streamlining of business operations, rightsizing of staff force and finetuning of capex allocation), and this should help mitigate the earnings / cashflow decline.

Cutting 2018-20E EPS Forecasts by 12-29%

We have lowered our 2018-20E core earnings forecasts by 12-29% after incorporating: (i) 7% reduction in 2018E average broadband prices, 25% reduction in 2019-20E. The internet segment contributes to 33% of TM’s 2017A revenue. The full year revenue impact from lower broadband prices isapproximately -7%; (ii) lower marketing, staff costs and other opex in 2019- 20E in anticipation of more stringent cost control / cost optimization after the revenue decline; and (iii) higher user migration from streamyx to unifi and higher overall subscribers growth.

Lowering 2018E DPS forecast, maintain 2019-20E DPS at 18.6 sen, as per TM’s dividend policy

We lowered our 2018E DPS forecast but maintain 2019-20E DPS at 18.6 sen per share, based on TM’s current policy to payout a minimum of RM700m per year. Management has stressed that maintaining the current dividend policy if one of its top priority. Based on its current earnings trajectory, after imputing the 25% broadband price cut, we believe TM has the capacity to maintain the minimum payout. That said, there are risks of policy change, should broadband prices continue to slide.

Maintain HOLD With a Lower TP of RM3.50

We maintain our HOLD rating with a lower DCF-derived target price of RM3.50 (from RM4.00). While the upfront earnings cut are significant (-23% to -29% for 2019-20E), we believe the long-term impact will be relatively muted – we expect the price cut to trigger material strategic review at TM on its costs and capex plan, which should lead to long-term cost reductions beyond 2020. TM’s share price has fallen by 26% mom due to concerns over a price cut. At 25x 2019E PER / 5% 2019 dividend yield (after 25% broadband price cut), valuations look fair.

Key Risks

Key downside risks to our call are further reduction in broadband price; a policy reversal / sharing of cost would be an upside surprise.

Source: Affin Hwang Research - 21 Jun 2018