What’s New

• Entry level package - In line with the government’s call for higher broadband speed and lower prices, Telekom Malaysia (TM) has announced its entry level Unifi package of 30Mbps priced below RM100 for Malaysians under the B40 income level. The no-frills package offers only broadband data with no audio or Hypp.tv and is priced lower by over 40% from RM179 previously.

• Speed upgrade - In addition, TM also announced speed upgrade for existing subscribers by more than double. Exact details of the new plans will be announced 12th July.

Comment

• Minimal incremental costs - Management noted that TM has the capacity to offer higher speed at minimal incremental cost by optimizing current infrastructure.

• In 1Q18, Internet revenue contributed 36% of revenue. Average Revenue Per User (ARPU) for Streamyx broadband is at RM90 while ARPU for UniFi stands at RM194. Total broadband subscribers stands at 2.3m with UniFi subscribers at 1.18m and Streamyx at 1.13m.

• Revised KPI - In view of the challenging environment, the management has revised downwards its KPI for 2018: revenue growth of -1% to flat (from 3.5%-4%), EBIT of RM1b (down from RM1.09b), and capex guidance down to 20-22% of revenue from high 20s.

• Dividend policy maintained – Despite concerns, management is maintaining its dividend policy of RM700m or 90% of normalized PATAMI, whichever higher, after reducing capex. Previously in 1Q18, 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.

Earnings Outlook/Revision

• Estimates maintained – We are keeping our forecasts as we have previously lowered our earnings estimates to account for adjustment in broadband prices and speed.

Valuation & Recommendation

• Upgrade to BUY from HOLD with an unchanged target price of RM3.90 based on DDM in view of recent selldown in share price. The stock offers attractive dividend yield of 5.6%.

Source: JF Apex Securities Research - 4 Jul 2018