Positive Updates, But Price Risks Linger

We maintain our HOLD call on TM with an unchanged TP of RM3.50. TM had announced yesterday: (i) revisions to its 2018E headline KPIs; (ii) implementation of Performance Improvement Programme 2018; and (iii) new broadband plans. We are positive on these updates – the revised EBIT guidance of RM1bn is 11% above our forecast and the new broadband plans have limited impact on ARPUs (against our expectation of a 25% cut). That said, we still see lingering risks on ARPUs as we expect the government to push for price reductions for all user groups. TM’s share price is down 35% qoq on concerns over the price cut. But, at a yield of 5.6%, the riskreward proposition looks balance.

Revised 2018E KPIs – Flat to 1% Decline in Revenue, EBIT at RM1bn

TM has revised its headline KPIs for 2018, taking into consideration the changing business landscape. Its revised KPIs are: (i) -1% to flat revenue growth (from +3.5% to +4.0%); (ii) EBIT of RM1bn (from RM1.2bn, similar level as 2017A); and (iii) customer satisfaction measure of 72 points (from 74). The group has also lowered its 2018 capex guidance to 20-22% of revenue (from the high 20s%). We had anticipated a cut in TM’s KPIs, in view of the government push to lower broadband prices. That said, TM’s revised 2018E EBIT guidance of RM1bn is above our forecast of RM900m but within consensus estimates.

PIP 2018: Focus on Revenue, Profitability, Cash Flow and Productivity

Adapting to the changing landscape, TM has embarked on the 4th wave of its Performance Improvement Programme 2018 (PIP 2018), focusing on 4 pillars, namely revenue uplift, sustained profitability, improved cash flow and increased productivity.

Introducing New Plans: Lower Price for B40, Higher Speed for Others

TM also introduced its new broadband and mobile plans, as follows: (i) a new affordable entry level unifi package of 30Mbps for the B40 segment which comprises households with monthly income of RM3,900 and below. The group can access broadband through this package at a price point below RM100 (>40% discount on existing 30Mbps package); (ii) unifi ‘turbo’ plans offering more than double the current broadband speed at no extra cost; (iii) special package upgrade for Streamyx customers in Unifi areas; and (iv) a re-launch of its Unifi Mobile postpaid plan.

Other Takeaways From the Analyst Briefing

Key takeaways from the analyst briefing: (i) TM maintains its dividend policy to pay the higher of 90% of normalised PATAMI or RM700m (c.18.6 sen per share). Notwithstanding a weakened EBIT outlook, a reduction in capex should help sustain its dividend policy; (ii) TM has the capacity and bandwidth to increase its broadband speed at a low incremental cost; and (iii) management believes that its new broadband plans are in line with the government’s broadband aspiration to lower both absolute broadband package prices and price per Mbps.

The Updates Are Positive, But Broadband Price Risk Remains

We are positive on TM’s business updates. The new broadband price plans, in our view, should have little impact on the group’s broadband ARPUs, considering: (i) the B40 group (who will enjoy a >40% reduction in ARPUs) makes up only a small proportion of TM’s 30Mbps subscriber group; and (ii) TM intends to maintain the monthly fees for non-B40 subscribers, whilst doubling their broadband speed. Management’s revised 2018E EBIT guidance of RM1bn is above our forecast of RM900m, largely due to the relatively unchanged broadband ARPU targets, versus our expectation for a 25% cut by end-2018.

We make no changes to our earnings forecasts as we continue to see downside risks in the broadband prices. The Pakatan Harapan government has stated in its manifesto that “we will take the necessary steps to halve the price of broadband internet while doubling its speed”. We will not be surprised if the government pushes further for a broadbased reduction in absolute broadband prices.

Maintain HOLD With An Unchanged TP of RM3.50

We reiterate a HOLD rating and DCF-derived 12-month target price of RM3.50. TM’s share price has fallen by 35% qoq due to concerns over a broadband price cut. We expect the share price to firm up in the short term on these positive updates. However, lingering concerns over broadband prices should cap the share price upside. At 23x 2019E PER / 5.6% 2019E dividend yield, valuations look fair. Key downside risks to our call would be further reductions in broadband prices. A policy reversal / the government’s endorsement of TM’s new broadband plans would be a key upside risk.

Source: Affin Hwang Research - 4 Jul 2018