Telekom Malaysia (“TM”) remains as our top pick in the Telecommunication sector. Both Astro and Maxis have targeted to unveil their joint IPTV packages by end-April. The market generally perceives the joint Astro-Maxis IPTV to be a real competition risk to TM’s Unifi. We believe the right market strategy is the key for TM to sail through the challenging wave in the upcoming IPTV battle. Based on our actual price/consensus target price study, we believe that there could be some near-term trading opportunities in TM. Meanwhile, in view of the uncertainty of the upcoming general election outcome, we believe the group’s share price could find its near-term floor level when its EV/forward EBITDA valuation falls to the mean level at 6.3x, implying a targeted floor price of RM4.92. We are maintaining our OUTPERFORM rating on TM with an unchanged target price of RM6.25 based on a targeted FY13 EV/forward EBITDA of 7.7x (+1.5 SD).

The right marketing strategy is the key to sail through the challenging wave in the IPTV battle. While the market generally perceives the upcoming Astro-Maxis IPTV to be a real competition risk to TM’s Unifi, we believe the latter could continue to enjoy its competitive advantage should the company’s marketing strategies remain competitive. Based on our SWOT analysis (please refer to our telco sector report dated 21 March), we believe that the key differences between TM’s Unifi and the upcoming Astro-Maxis IPTV packages are mainly in two main areas namely: 1) broadband pricing and 2) TV contents, especially the sport channels. TM has earlier introduced customer retention plans to retain its customers. On top of that, we also understand that TM has prepared several enhanced HSBB plans to sail through the challenging wave. Although management has continued to remain silent on the details (for marketing strategy purposes), we believe that its upcoming enhanced HSBB plans could focus on providing more value-added services (i.e. increasing the broadband speed or bundling more TV channels) under its current packages instead of compromising on its subscription fees and margins.

Short-term trading opportunities in TM? TM’s share price has corrected 12.6% for the YTD (as of 15 March 2012) due to the disappointment on its special dividend as well as the intensifying competition in its IPTV segment. The group’s share price is now at a 8.0% discount to its consensus target price (“TP”) of RM5.74 and is about 730 bps below TM’s 5-year actual price/consensus TP average discount rate of -0.7%. As a result, should TM’s consensus TP remain unchanged, this suggests that some near-term trading opportunities may arise if the discount rate narrows to its mean level.

Near-term floor valuation. While we believe the uncertainties of the upcoming 13th GE could have been factored into the share price, any unanticipated election result may increase the market volatility in the postelection period, especially in the first trading day. Although we believe that the Telco sector is generally defensive in nature, we do not discount that the incumbents’ share prices may potentially trend downward in tandem with the broad market should the sentiment turn weak after the GE. Under such circumstances, we believe that the sector could reach its near-term floor should the incumbents’ EV/forward EBITDA valuations fall to their respective mean levels. Under such a scenario, we believe that TM’s share price could potentially reach its near-term floor at RM4.92.

Source: Kenanga