Telekom Malaysia (TM) has signed a 15-year contract to provide digital terrestrial television broadcasting infrastructure, network facilities and related services to MYTV Broadcasting Sdn Bhd (MYTV) for RM916.1m. While we are POSITIVE on the contract award, the financial impact, however, is expected to be insignificant. No change in our FY16E/FY17E earnings forecasts. Maintain OUTPERFORM with an unchanged target price of RM7.18 based on targeted FY17E EV/forward EBITDA of 7.9x. The group’s share price has retreated by 6.3% YTD and 5.4% since the 2017 Budget announcement, which could provide some bargain hunting opportunities for year-end window dressing. We like TM for: (i) less competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion.

Offer DTT Infra for MYTV. TM has entered into a Service Agreement for the Provision of Digital Terrestrial Television (“DTT”) Broadcasting Infrastructure, Network Facilities and Related Services (“Service Agreement”) with MYTV Broadcasting Sdn Bhd (“MYTV”).

Details of the Service Agreement. Under the Service Agreement, TM will provide MYTV (a) the terrestrial distribution network, (b) satellite distribution network, (c) Broadcast contribution network, (d) station facilities and infrastructure, (e) operation and maintenance, (f) satellite transponder, (g) business processing outsourcing contract centre, (h) TM direct Internet connectivity, as well as (i) managed IP telephony. In return, MYTV will pay TM a total sum of RM916.1m for 15 years until 31 December 2030 with an option to extend. Both TM and MYTV may mutually review the provisions of the Service Agreement every five years with the first review to take place in the year of 2019.

Rationale. The subscription of the Services from TM shall allow MYTV, which owns the license to operate the infrastructure and network facilities for DTT in Malaysia, to realise the migration of analogue terrestrial broadcasting to digital through the county by end-June 2018. From TM perspective, it would allow the group to take part in the transformation in the country’s broadcasting industry as well as to ride with MYTV’s growth.

Minimal financial impact. The award is not a surprise to us in view of TM’s extensive and wide coverage of transmission sites in the country. The latest contract value implied an annual service agreement fee of RM61m, which is insignificant as compared to the group’s total turnover of c.RM12b. On top of that, we believe, the margin of this contract could be relatively thinner due to the national interest angle. For illustration purpose, assuming a 20% PBT margin, the contract may contribute an additional RM12.2m profit (or 1.1%) to the group’s FY17 PBT, which is negligible in our view.

Maintained earnings forecast. We are keeping our FY16E/FY17E earnings forecasts unchanged, pending the upcoming 3Q16 result releases due 25th November. Maintain OUTPERFORM with an unchanged TP of RM7.18 based on targeted FY17E EV/forward EBITDA of 7.9x, representing an unchanged +1.0x SD above its 2-year mean.

Source: Kenanga Research - 15 Nov 2016