We downgrade Telekom Malaysia (TM) to HOLD (from Buy) with an unchanged DCF-derived 12-month price target of RM4.15. TM’s share price has rallied by 53% since it announced strong 1Q19 results and on growing optimism on TM’s cost-optimisation initiatives and the appointment of a permanent CEO. While we are positive on those initiatives and forecast a strong margin improvement, we believe the stock price has largely priced in these positives. On the other hand, TM’s revenue outlook remains weak and there are lingering regulatory pressures on its Streamyx business and network expansion plan. At a 16x 2019E PER, TM now trades at 1SD below its 7-year average and looks fair, considering its weak revenue outlook and higher competition in the fixed broadband market.

We Are Optimistic on TM’s 2019 Earnings Outlook

Notwithstanding a weaker revenue, TM reported a commendable EBIT margin of 18.5% in 1Q19 (a multi-year high) attributable to its costoptimisation initiatives and the adoption of MFRS 16 (Leases). While we believe the cost savings are largely sustainable, the higher customer project and domestic roaming costs in the coming quarters may lift TM’s operating costs vis-à-vis 1Q19. Overall, we are optimistic on TM’s 2019 earnings outlook – we forecast TM to achieve an EBIT of 14.3% (vs. 9- 13% in 2012-18) and a higher core net profit of RM962m (+52% yoy).

Other Opportunities and Challenges

Other events that may affect TM’s long-term profitability are: (i) TM has recently appointed Dato’ Noor Kamrul Anuar as its MD / CEO. We will follow up on his detailed strategy for TM and his approach to revenue / cost / capex and network expansion; (ii) Communications and Multimedia Minister Gobind Singh has issued a statement urging TM to resolve issues faced by Streamyx customers. TM will be submitting a proposal within a month; and (iii) we expect MCMC to allocate the 700MHz spectrum by end-2019 and 5G spectrum(s) by 2020. TM may participate in the spectrum biddings / auctions. A higher-than-expected capex would dampen TM’s near-term profitability.

Downgrade to HOLD Following Sharp Price Gains

TM’s share price has rallied by 53% following its strong 1Q19 results, positive earnings guidance and the appointment of a permanent CEO. At a 16x 2019E PER, we believe these positives are priced in and valuations looks fair. Downgrade to HOLD with an unchanged price target of RM4.15.

Source: Affin Hwang Research - 26 Jun 2019