What’s New

• Communications and Multimedia Minister Gobind Singh Deo announced that fixed broadband prices are expected to drop by at least 25% by year end following the implementation of the Mandatory Standard on Access Pricing on June 8.

• The wholesale prices are still being finalized pending commercial discussions among relevant parties, which could conclude in July or August.

Comment

• The announcement could be viewed positively as the reduction of 25% is lower than the expected 50% stated in Pakatan Harapan’s manifesto, which could have been factored in by the selldown in share price.

• Internet revenue contributed 36% of 1Q18 revenue and is the main growth driver for TM.

• ARPU threatened – TM’s Average Revenue Per User (ARPU) for Streamyx broadband is at RM90 while ARPU for UniFi stands at RM194.

• More subscribers to come? – As a result of the government’s announcement, TM could roll out more affordable packages to attract new subscribers as well as upselling to current Streamyx subscribers. Higher subscribers could help cushion the drop in ARPU. Total broadband subscribers stands at 2.3m with UniFi subscribers at 1.18m and Streamyx at 1.13m.

• Dividend policy in danger? - Cash reserves dwindled to RM1.46b from RM1.72b in 4Q17. As a result, gross debt/EBITDA soared to 2.64x (from 2.31x in 4Q17) and exceeded management’s internal guideline of 2.5x, raising concern on its dividend policy of RM700m or 90% of normalized PATAMI, whichever higher.

Earnings Outlook/Revision

• Earnings estimates slashed – To account for the upcoming ARPU reduction, we are lowering our revenue and EPS forecast for FY18 by 5% and 10% while FY19 estimates are reduced by 5% and 9% respectively.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM3.90 (from RM4.58 previously) based on DDM.

Source: JF Apex Securities Research - 21 Jun 2018