We upgrade our call to OP (from MP) on the back of a higher DCF- driven TP of RM4.95 (from RM4.20, WACC: 7.8%, TG: 1.5%). With the return of a management figurehead, we anticipate TM could realise more cost saving initiatives in the future. Additionally, we expect the JENDELA target to increase broadband premises passed to 7.5m (from 4.95m) to bode well for TM. While the mobile space is seeing heightening competition, investors might seek fixed-line players being more resilient with homebound work arrangements becoming more commonplace.

Hopes to front more cost savings. The return of Imri Mokhtar now as group Managing Director and CEO could spur some positive tailwinds for the group’s profitability. Recall that he led various efforts in moving the 3-year Performance Improvement Plan 2018 forward during his earlier tenure. As businesses progressively reopen and customer acquisitions pick up pace, we do not discount opportunities for streamlining as inefficiencies surface. Efforts may include contract re-negotiations with vendors and manpower reorganisation to boost efficiencies in certain business units. Further, past administration’s goals to extend Unifi mobile’s presence could be shelved, leaving the group with more resources to focus on key products.

Laying down more cables. The JENDELA Phase 1 initiative by MCMC aspires for wider fixed broadband availability from 4.95m premises passed in CY20 to 7.5m premises by CY22. As part of the initiative, the new cable lines could also be a determinant of the national 5G readiness by Phase 2 in 2022. This would open a wider customer base for TM in the underserved areas, but without the expectation of low entry-level priced plans from the previous NFCP (1% of GNI, or c.RM40/mth). The wider access would also present a strong case for TM to play a prominent role in the eventual deployment of 5G given the heavy reliance on an extensive fibre network to support the backhaul infrastructure.

Less precarious situation. Mobile players have been marketing “unlimited” data packages or the likes to tap into customers whom are more budget cautious and willing to compromise speed for longer accessibility. Adding to this, expectations of U Mobile’s long-awaited listing to materialise in the coming quarters could influence the appetite and valuations for mobile players. On the flipside, fixed-line players (especially TM) are less susceptible to changes in the competitive landscape. While ARPUs may see some minor swings from the MCO, overall long-term demand should remain sticky, particularly with the rise of homebound work arrangements. Granted, TM has the widest outreach amongst other available offerings in the market.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM4.95 (from RM4.20, previously). Post-update, while we leave our FY20E assumptions unchanged, we tweak our FY21E earnings by 3% and 10-year DCF assumptions to account for a more cash accretive outlook. Our new DCF assumptions also consist of WACC of 7.8% (from 9.2%) with an unchanged terminal growth of 1.5%. To recap the abovementioned, this is on the back of leaner cost structures paired with progressively broader market penetration. Though visibility of the allocation for the 5G spectrum is still lacking, we reiterate our previous thesis that even if TM is not awarded a piece of the spectrum, it is likely to have to lease its fibre footprint to serve the new network, therefore still playing an important role in 5G development.

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

Source: Kenanga Research - 25 Sep 2020