News

Yesterday, Telekom Malaysia (TM) announced the signing of High Speed Broadband 2 (“HSBB2”) and Sub Urban Broadband (“SUBB”) projects with the Government of Malaysia.

The HSBB2 infrastructure will be rolled out over a period of 10-year with the Government investing RM500m and TM RM1.3b to provide high-speed broadband access (which include Fibre-to-the home, Ethernet-to-the-home and Very High Speed Digital Subscriber Line 2 to over 390k premises by 2017.

Similarly, the SUBB infrastructure will be rolled out over a period of 10-year with the authority investing RM600m and TM1.0b to provide high-speed broadband access to over 420k premises by 2019.

HSBB2 will cover other economic areas, including the state capitals and selected major towns while SUBB will be focused on the sub urban and rural areas.

The HSBB2 and SUBB projects are key initiatives in the effort to widen broadband penetration in the country with an aim to provide applications and content development with speed up to 100 Mbps for both homes and businesses.

Comments

We are positive to these long-awaited execution agreements, where the Government grants came in higher than our earlier expectation (c.20% vs. 27.8% (under the HSBB2) and 37.5% in SUBB). Note that, the total investment cost of HSBB1 was stood at RM11.3b of which 21.2% (or RM2.45b) was from the Government’s coffer.

After securing the HSBB1 project in 3Q08, TM has subsequently commercially launched its broadband services in 1Q10 and achieved c.46% take-up rate (or 793k Unifi subscribers) as of end 3Q15. The group’s retail segment turnover, meanwhile, also soared from RM6.8b (in FY10) to RM8.4b in FY14 (9M15: RM6.4b). Thus, with its vast network experience coupled with encourage requests received outside the HSBB1 areas; we reckon the gestation periods of the HSBB2 and SUBB projects are likely to be shorter.

Funding is not an issue given TM’s hefty war chest of RM3.4b with gross debt to EBITDA ratio of 1.86x (vs. its optimal capital structure of 2.0x-2.5x gross debt to EBITDA) as of end 3Q15.

Outlook

TM’s broadband demand is expected to remain buoyant, despite a challenging CY16 economy outlook. The higher broadband demand is expected to be underpinned by: (i) the continuous introduction of more network convergence services, (ii) affordable broadband pricing, and (iii) raising awareness of the benefits of broadband adoption.

Forecast

We leave our FY15 net profit unchanged but raised FY16 by 0.6% after imputed higher Unifi subscribers’ net add of 120k (vs. 60k previously). FY16 capex also being raised to RM3.6b from RM2.5b previously.

Rating

Maintained OUTPERFROM

Valuation

Our TM target price maintained at RM7.33, based on a targeted FY16 EV/forward EBITDA of 7.8x (+1.5x SD above its 5-year mean).

Risks to Our Call

Regulation risk and worse-than-expected contribution from P1

Source: Kenanga Research - 18 Dec 2015