Journey to Wealth

Telekom Malaysia - Smooth sailing

kiasutrader
Publish date: Wed, 11 Jul 2012, 09:53 AM

While competition in the FTTH segment has intensified, TM believes it will still be able to enjoy a healthy growth and continue to gain market share here due to its first-mover advantage. The group is planning to respond by adding more value-added services to its current packages instead of compromising the subscription fee to retain its Unifi subscribers, whose 2-year contracts are due to renewal in 2013. TM has yet to decide the level  of its participation in the DTTB system given that the RFP comprises of infrastructure and set-top boxes that vary from the company's initial intention, which focus merely on the infrastructure segment. The group's RM1.07b capital distribution plan is targeted to complete in August. Going forward, we reiterate our view on TM for it to declare another capital initiative plan in FY12 judging from its healthier cash flow and lower capex trend. The  downside risk on our assumption is the additional capex required  should TM manage to seal the DTTB project. We are maintaining our OUTPERFORM rating on TM with an unchanged target price of RM6.36, based on a targeted FY13 EV/forward EBITDA  of 7.3x (+2.0x SD). 

Focus on adding value-added services to retain Unifi subscribers. Maxis has lately repositioned its fibre-to-the-home packages by lowering their subscription fees with IPTV services to be likely introduced in the later stage. While TM is aware that the competition in the home broadband segment is escalating, management believes that it will still be able to enjoy a healthy growth and continue to gain market share, at least in the short to mid-term due to its first-mover advantage. Nevertheless, it plans to respond by adding more value-added services to its current  packages instead of compromising the subscription fee. TM believes this is the most effective way to retain its clients given there are a large group of Unifi's subscribers who are due to renew their 2-year contracts in 2013. Note that TM's total Unifi subscribers have grown to 237k in 4Q12 from 33k a year ago. It growth momentum does not appear to be slowing with about 390k sign-ups as of end-June vis-''-vis 316k in 1Q12. 

Proposal for DTTB system is currently under evaluation. MCMC has lately issued a request for proposal (RFP) for the  DTTB (digital terrestrial television broadcasting ('DTTB') system, which is a plan to convert the current analogue broadcast system into a digital format, with submissions due on July 25. Media news had earlier reported that the DTTB project, including the entire infrastructure and set-top boxes, was estimated to cost RM1.0b. We understand that TM earlier indicated that it is only interested in the infrastructure segment with a capex allocation  of RM600m-RM700m. Nevertheless, in view that the RFP now comprises of both infrastructure and set-top boxes, TM is still evaluating the proposal. 

Targets to complete the capital distribution in August.  TM has filed its proposed capital repayment petition to the High Court on 27 June with the hearing set on 13 July. Management is targeting to complete the capital repayment plan by August should everything go according to schedule. To recap, TM had proposed a capital repayment of approximately RM1.07b (or 30.0 sen/share) in conjunction with its 4QFY11 results through the reduction of its par value from RM1.00 to RM0.70. Going forward, we believe, TM could continue to reward its shareholders by tabling another capital initiative plan should there be no additional capex required by the company. We are keeping our FY12 dividend forecast of 49.6 sen (19.6 sen annual dividend and 30.0 sen from a capital initiative plan) unchanged.

Source: Kenanga
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