Telekom Malaysia (TM) has unveiled new affordable broadband plans with price cuts and earnings impact that are lower than our/market expectations. Besides, TM had also revised its 2018 headlines KPIs. All in, we maintain FY18E earnings but reduced FY19E earnings by 1%. The recent sharp share price correction is overdone in our view. OUTPERFORM maintained with a higher DCF-driven target price of RM4.00.

Revised 2018 Headlines KPIs. TM has revised its FY18 KPIs due to evolving market dynamics and a challenging operating environment. The group has lowered its revenue growth for 2018 to -1%-flat (vs. 3.5%-4% previously); normalized EBIT to c.RM1.0b (vs. RM1.2b previously); and capex/revenue ratio to 20-22% (vs. high twenties previously). Despite lowering headline KPIs, management is keeping its dividend policy (at RM700m or 90% of normalized PATAMI, whichever is higher) unchanged. All in, we were not surprised to the downward headlines KPIs revision given the tepid 1Q18 result performance as well as the evolving market dynamics.

Introduced cheaper broadband plans. To align with the Government broadband initiatives, TM is set to introduce several broadband plans in the coming months. Top of the list is an affordable entry level Unifi@30Mbps plan to lift the burden for targeted B40 segment of the population. The plan is set to make available for pre-register from mid- July with a price tag of below RM100, which is more than 40% below the existing 30Mbps package. Besides, existing Unifi subscribers will also be able to enjoy more speed that is twice faster than currently at no extra cost under the new Unifi ‘turbo’ plans, which aim to be available for registration from 15 August 2018 onwards. The new customers, meanwhile, who subscribe to existing Unifi plans before the end of CY18 will also be upgraded accordingly in the year 2019. On top of that, a special package upgrade for pre-Unifi (formerly known as Streamyx) customers in Unifi areas nationwide as well as a re-launch of its ‘unlimited Unifi Mobile postpaid plan (which gives customers unlimited data, calls and messaging) will also be made available for registration from mid-July 2018 onwards.

Risks or opportunities? While one may be concerned that the upcoming affordable broadband price (<RM100) may cause the current B40 subscribers to downgrade their subscription plans, the relatively low household coverage area in the B40 segment currently (at c.20%) may suggest that there are ample room for TM to expand its broadband services via the affordable broadband package, in our view (please refer to overleaf page for details).

Keeping FY18E but lowering FY19E earnings forecast by 1%. Despite TM revising its FY18 KPIs, we are keeping our FY18E numbers unchanged (as we had lowered our earnings estimate earlier post the tepid 1Q18 performance amid the challenging operating outlook) but reduced our FY19E earnings by 1% after factoring in the upcoming lower broadband package to the B40 segment.

Maintain OUTPERFORM call but with higher DCF-driven TP of RM4.00 (vs. RM3.70 previously). Despite the mild adjustment to our FY19E earnings, we have raised our DCF-derived TP to RM4.00 after lowering: (i) FY18 capex/revenue ratio to 22% (vs. 25% previously), and (ii) WACC to 8.1% (vs. 8.4% previously) to reflect the better-than- expected broadband price adjustment and thus lower earnings risk ahead. We believe, the recent sharp share price correction has been overdone, thus providing great bargain hunting opportunities to investors from here. Besides, the decent dividend yield of 5.6% could also attract yield-seeking investors.

Source: Kenanga Research - 04 Jul 2018