Telekom Malaysia (TM) and Tenaga National Bhd (TNB) have signed a MoU to implement the Nationwide Fiberisation Plan. All in, we are NEUTRAL and keep our FY17E/FY18E earnings forecasts unchanged. We reiterate our OUTPERFORM call on TM with unchanged DCF-driven target price at RM6.85.

MoU signed to accelerate broadband reach for the nation. TM and TNB have signed a Memorandum of Understanding (MoU) to jointly develop an implementation plan to deliver the Government’s Nationwide Fiberisation Plan (NFP). The collaboration is set to capitalize on the combined strength of both government-linked companies (GLCs) in terms of reach, infrastructure and expertise, which could enable the most efficient cost structure, and further accelerate the country’s fiber broadband network reach. The MoU is subject to a definitive agreement to be signed between the parties upon finalization of the commercial terms.

Nationwide Fiberization Plan. To recap, the government has earlier announced the 2017-2019 Nationwide Fiberization Plan which aims to connect some six million premises, including an estimated two million premises in the rural areas to a fiber network. A 3-tier model would be established, where the First Tier would involve utilisting TNB’s fiber trunk network for wholesale backhaul services. The Second-Tier would involve on Wholesale Service Provider(s) to offer last mile access, while the Third-Tier providers would comprise existing telecommunication companies offering retail services to consumers and business. The plan is in line with Prime Minister Datuk Seri Najib Tun Razak’s 2017 Budget announcement to double broadband speeds at lower prices by 2019. The authority subsequently announced the appointment of Broadnet Network, in which the Ministry of Finance will own a golden share, to build a high-speed broadband infrastructure in December last year.

Consumers – the ultimate winner. The government’s nationwide fiberisation plan is set to expand the country’s fixed broadband infrastructure and benefit to the whole nation as many rural areas still do not have high-speed broadband. Despite several players providing broadband services, pricing and network quality are still incomparable against other countries. The government has launched several broadband initiative plans (i.e. HSBB, HSBB2 and SUBB) to increase the broadband penetration rate in different zones/areas (figure 1). With the right broadband policies and strategies in place, we believe the country is on the right track to achieve its targets set out in the 11th

Malaysia Plan (figure 2).

Maintain OUTPERFORM with unchanged DCF-driven TP of RM6.85. We are keeping our FY17/FY18E earnings forecasts unchanged as the definitive agreement is yet to be finalised. Having said that, we are NEUTRAL as the positive catalyst (where we believe TM is set be appointed as the key second-tier provider (under the Nationwide Fiberisation Plan) and thus allowing it to penetrate areas not covered by HSBB, HSBB2 and SUBB) could be overshadowed by the potential cut in broadband pricing by 2019. Maintain OUTPERFORM call on TM on: (i) less competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion) with an unchanged DCF-driven target price at RM6.85.

Source: Kenanga Research - 17 Jan 2018