Post-conference call with management, we see possible short-term risks from the on-going Movement Control Order (MCO) fromloss of customers (mainly SMEs) with capex plans being shifted to ensure network quality from the surge in usage. That said, continual cost rationalisation could mitigate earnings pressure with its 5G ambitions still much alive. At current market capitalisation, TM seems poised for re-entry into the KLCI in the upcoming June review. Maintain OP and DCF-driven TP of RM4.30 (WACC: 9.2%, TG: 1.5%).

Restrained by MCO. The MCO’s enforcement has led to the closure of nationwide TM Point outlets, prohibiting over-the-counter customer registration and payments. Consequently, this resulted in higher online registrations, albeit installation works for new customers could only commence once the MCO is lifted. So far the group has not offered discounts for its customer, with SMEs seeking deferment of payment. With the standstill in economic activity, it is not implausible to expect growing default risks and loss of subscribers amongst this customer group. At the cost-side, management commented that its cost to offering free channel access to its unifi TV viewers is immaterial. Also, continual cost savings initiatives (contract re-negotiations, manpower rationalisation) should keep profit afloat despite top-line risks.

Patchy capex. The MCO has also led to the group refocusing its capex plan to be more backhaul-based to keep up with the rise in internet usage. Management added that RM10m of the RM400m mentioned in the government stimulus has been allocated for this purpose. This shift could lead to a revision in guided capex spending for the year (low-to-mid 20% of revenue), which could be further aggravated by possible MCO extensions.

Weaving through a new landscape. The telecommunications industry has been affected by the change in government and measures taken to suppress the Covid-19 pandemic. As priorities have shifted, it is probable that the earlier NFCP target to offer entry-level broadband packages (c. RM40/month) might not materialise this year. This may be to TM’s benefit as it puts off dilution risks to its household subscribers (4QCY19 unifi ARPU: RM153/month, Streamyx ARPU: RM96/month). That said, if it were to materialise, we believe it would not be substantial enough to negatively impact the group, given it targeted rural/low income areas which may not see a high take-up. In addition, current development appears to have put the national 5G rollout on hold, with risks of delaying the earmarked 3QCY20 commercialisation timeline. We view that regardless of any given structure (consortium or not), and award and allocation of spectrum, we believe that TM would still play a meaningful role in the eventual roll-out of 5G, given its extensive fibre network.

Post update, we leave our assumptions unchangedfor now, pending updates in guidance from management in conjunction with its 1QFY20’s results reporting at 21 May 2020.

Maintain OUTPERFORM and DCF-driven TP of RM4.30. Our target price (based on WACC: 9.2%, TG: 1.5%) implies an EV/Fwd. EBITDA of 2.8x on our FY21E earnings. Despite guarded near-term outlook, we believe the group still offer solid long-term prospects helmed by its: (i) leaner cost structure, and (ii) solid case for a role in 5G. Further, given the shake-up in the existing market, a high possibility arises that TM is poised for re-inclusion into KLCI in the coming June review. This could be a strong positive re-rating catalyst for the stock.

Risks to our call include: (i) weaker-than-expectedvoice and internet demand, (ii) stronger-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 16 Apr 2020