Telekom Malaysia (TM) is on track to deliver and striving to outshine the authority’s HSBB and SUBB targets again by end-CY16. The group also highlighted that its mobile arm is progressing well and on-track to launch its mobile services later this year. Besides, TM also intends to leverage on its Wi-Fi service to provide seamless users experience in both LTE and Wi-Fi roaming. The aggressive pricing competition appearing in the fixed-home fibre space will not provide an immediate threat to TM due to its extensive coverage. All in all, we have raised our FY16/17E net profit marginally by 0.3%/0.9% after revising our UniFi ARPU assumption. We reiterate our MARKET PERFORM call on TM, with an unchanged target price of RM6.92 based on targeted FY16 EV/forward EBITDA of 7.7x (+1.0 SD above its 4-year mean).

On track to deliver HSBB2 and SUBB targets. Despite the HSBB2 and SUBB agreements with the authority inked only in mid- December last year, TM has delivered and exceeded the government’s targets by providing access to c.185k/150k (vs. c.150k/117k that set by the lawmaker), respectively, as of end- CY15. With vast technical experience gained in the previous HSBB project, TM is aiming to outshine the authority’s targets (c.250k/222k premises passed in the HSBB2 and SUBB, respectively) again in end-CY16. By assuming the current HSBB’s take-up rate of 44%, this suggests that TM’s broadband subscribers’ base could potentially increase by another 208k customers by year-end, all else being equal. Note that, under HSBB 2, 95 additional exchanges will be HSBB-ready providing access to 390k premises by 2017, whilst SUBB involves delivering high-speed broadband access (up to 20Mbps through copper line upgrades and up to 100Mbps for areas deployed with Fibre-to-the- Home technology) to over 420k premises by 2019.

As of end-CY15, around 56% of the group’s 2.34m broadband customers were on the package of 4Mbps and above, of which 386k (or 46% out of the 839k UniFi subscribers) were subscribed for 10Mbps and above packages. ARPU-wise, Streamyx’s net ARPU merely stood at RM89 vs. UniFi’s blended ARPU of RM190, thus suggesting plenty of rooms for up-selling. The group has revised its UniFi packages since last October and offering RM179/month onwards for 30Mbps under the Advance packages as compared to the terminated VIP5-20Mbps plans priced at RM158/month onwards previously. All in all, while we maintain our FY16/FY17E UniFi subscribers base assumption at 1.0m/1.2m, estimated ARPUs have been revised up marginally to RM194/RM198 (vs. RM190 each previously), respectively.

Mobile services launching target remains unchanged. TM highlighted that its mobile arm – P1, is progressing well and ontrack to launch its mobile services in 2H16. Followed the recent signing of the domestic roaming agreement with Celcom, TM-P1 customers will be able to roam on Celcom’s 3G network. The 4G LTE network, which has yet to be given a brand name, is expected to operate at the frequencies of 850Mhz and 2.6Ghz under the current TM-P1 spectrums. The group, meanwhile, also intends to leverage on its Wi-Fi service (which currently has c.8k+ hotspots) following the recent Wi-Fi roaming agreement signed with British Telecommunications PLC, to provide seamless users experience in both LTE and Wi-Fi roaming.

Source: Kenanga Research - 4 Apr 2016