We attended Telekom Malaysia’s (TM) tele-conference yesterday. The key highlight of the briefing is to address the concerns post the Budget 2017 announcement. TM is set to double its broadband speed in phases for its HOME segment subscribers in CY17 where the financial impact is expected to be minimal, in our view. We have lowered our FY16E/FY17E earnings by 0.6%/1.9% to account for the higher customer acquisition costs. Maintained OUTPERFORM but with a lower target price of RM7.18 (vs. RM7.20 previously) based on targeted FY17E EV/forward EBITDA of 7.9x, representing an unchanged +1.0x SD above its 2-year mean. We like TM for: (i) the less competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion.

Budget 2017. To recap, the authority has proposed; (i) fixed line broadband service providers to offer services at a higher speed for the same price, effective January 2017, (ii) the said package’s speed will be doubled with the reduction in prices by 50% within the next two years, (iii) MCMC to provide RM1b to ensure the coverage and quality of broadband nationwide reaches up to 20 Mbps.

Massive broadband speed upgrade in CY17 and…. TM will upgrade all its Unifi’s home subscribers’ packages to the next immediate upselling plan (i.e. UniFi 30 to UniFi 50) for same price, effective January 2017. For the Streamyx (Home) customers, the group will introduce a new greater value package to align with the speed enhancement initiatives announced in Budget 2017. All the upgrade, however, will be implemented in phases, subject to technical availability as it may require a new set of equipment to accommodate for the higher speed. TM highlighted that the immediate focus on doubling the speed in CY17 is for the HOME segment before moving into the SME/Enterprise segments, which require more time for review. As of end 1H16, the group’s Unifi has recorded 900k subscribers (of which 500k (or c.56%) are HOME users), representing a take-up rate of c.43%. The moderate take-up rate suggested that TM has a vast capacity to accommodate post the massive broadband speed upgrade.

….is expected to resume two years later. TM has yet to draw any conclusion with regards to the additional massive broadband plans that set to be review in CY19. Nevertheless, management does not discount that it may offer new plans that consist of different bundling value services to achieve the authority’s initiative.

Usage of the RM1b allocation fund remains vague as management is reluctant to elaborate and cited that the authority is the only right entity to clarify the issue.

No change in FY16 earnings guidance where TM is targeting to achieve: (i) annual revenue growth of 3-3.5% with normalized EBIT maintained at FY15 level (at c.RM1.52b), and (ii) capex/revenue ratio of 25% to 30% (or 30-35% including Webe). Note that, these headlines KPIs exclude Webe, HSBB2, SUBB and other mega project.

Financial impact is expected to be minimal. TM believes the massive broadband speed upgrade to have aNEUTRAL financial impact over the medium-term given that the risk is expected to be mitigated by a lower retention rate and better credit management. We concur with management’s view and believe the impact is minimal although the group’s supplies and materials costs are set to increase in FY16/FY17 due to various equipment upgrades. Having said that, it would be taxing for the group to double their broadband speed and slash prices by 50% two years later, based on the current packages offered. Capex-wise, TM is not expected to have any material changes in terms of the total capex allocation for the HSBB2 and SUBB projects but plan to accelerate its majority capex spend (from 2-3 years to 1-2 years) to align with the government’s initiative

Source: Kenanga Research - 25 Oct 2016