Telekom Malaysia (“TM”) remains cautiously optimistic of maintaining its fixed-line broadband market share despite the expected intensifying competition in the coming weeks. The group plans to further strengthen its presence in the FTTH segment through enriching its TV contents as well as customising its packages to cater for the different end-users need. On the other hand, TM’s wholesale segment stands to benefit from the recent introduction of mobile 4G-LTE services due to its stronger backhaul that can cater for the future demand surge in the bandwidth. Meanwhile, the group is also considering refinancing its bond that is maturing in end-2013 to take advantage of the current low interest rate environment. There is no change in our FY13-FY14 earnings forecasts. We reiterate our OUTPERFORM call on TM with an unchanged target price of RM6.25, based on a targeted FY13 EV/forward EBITDA of 7.7x (+1.5 SD).

Enhancing its broadband user experience. TM remains cautiously optimistic of preserving its fixed-line broadband market share due to its first-mover advantage in the FTTH (“Fibre-to-the-home) segment even though competitions are expected to intensify following the introduction of the upcoming Astro-Maxis IPTV services. Apart from strengthening its customer retention programmes, the group also intends to further enhance its customers’ experience via expanding its broadband offering through acquiring more TV contents as well as customising its packages to cater for the different end-users need. Management believes that providing more value-added services under its current packages will still be a better strategy to lure subscribers instead of compromising on the subscription fees and margins. Meanwhile, the group may also provide broadband services beyond the home. While TM is reluctant to share more details on this at the current juncture, we believe that it could be an effective way to further capitalise on its WiFi hotspots numbering more than 28k now.

Stronger backhaul. In view of its current much stronger backhaul in its network, TM’s wholesale segment stands to benefit from the upcoming surge in bandwidth demand following the introduction of 4G-LTE services by the various celcos. To date, the group has laid more than 450,000 km of fibre cables and migrated its legacy PSTN network to an all-IP New Generation Network (“NGN”). NGN services are tailored to meet the specific needs of different industries. Its services can range from connectivity (i.e. leased lines) to managed services (i.e. VPN and Metro-E) encompassing also IT and value based managed services such as ICT and business process outsourcing (“BPO”). Meanwhile, the group also intends to further strengthen its data centres services through My1Hub, which offers total solutions that include internet and bandwidth services to the domestic as well as global service providers. With these efforts, TM hopes to reduce its international bandwidth cost and further improve on its wholesale segment margin in the future.

Planning to refinance its bond. TM is considering refinancing its RM2.0b 6.20% coupon ISIS (“Islamic Stapled Income Securities”), a bond that is due to mature at end-2013, to take an advantage of the current low interest rate environment. For illustration purposes, assuming all the ISIS Bond parameters remained the same, every 1% drop in the coupon rate will allow TM to save RM20m in interest cost p.a.. As at end-FY12, TM has a cash pile of RM3.7b with a gross debt/EBITDA ratio of 2.1x. The ratio is still below its optimal capital structure of 2.0-2.5x gross debt/EBITDA level, suggesting that TM still has room to leverage up its balance sheet if needed.

Source: Kenanga