We came away from an analysts’ engagement session with En. Razidan Ghazali, CFO feeling comforted of its prospect. With JENDELA being drawn closely based on the group’s plans,itscapex is not expected to see additional stress. Cost optimisation pipeline is in the works with a 5-year plan in tow. Meanwhile, we continue to like fixed line players as opposed to mobile ones due to less competitive headwinds. Maintain OP with an unchanged DCF-driven TP of RM4.95 (WACC: 7.8%, TG: 1.5%).

Aligned with JENDELA. Recall that the new JENDELA initiative by the MCMC calls for wider fixed broadband availability for 7.5m premises passed by CY22 (from 4.95m premises in CY20). On concerns in materialising this ambition, TM’s expansion plans have already been laid out prior to JENDELA, which packages it with that of other operators to be more comprehensive. Hence, it should not result in additional capex stress to the group. This being the case, we believe that the risk of TM overstretching into less economical areas is better mitigated and it also would not jeopardise cost optimisation plans.

PIP to carry on. Riding on the success from the previous PIP (Performance Improvement Plan), management looks to form a 5-year roadmap where it aspires to introduce efforts for new cost savings of up to RM500m RM600m/year from operating expenses. This could involve further rightsizing to an optimal groupwide headcount of 15k-16k employees (from c.22k currently). In FY19, operating expenses (without depreciation and impairment) amounted to c.RM7.55b or 66% of revenue (manpower costs equated to 23% of revenue). Contract negotiations with vendors are also widely considered to keep costs lean.

Longer term picture still in drawing… We understand that the group is still in the midst of finalising its longer-term strategies while navigating around the unprecedented Covid-19/MCO business climate. As copper networks are intended to cease by CY25, Streamyx-based offerings have to be phased out progressively. At least for now, mobile services are still expected to complement existing products which we believe will be value-accretive.

…but immediate outlook should be intact. We do not anticipate ARPU to be at risk as it is hovering close to low-tier offerings (i.e. as at 2QFY20, Unifi: RM140/mth, Streamyx: RM90/mth) with subscribers cemented by higher data consumption, particularly from more homebound arrangements. We do not anticipate any subsequent installations to be hindered as badly as the March lockdown phase due to more lax requirements. Meanwhile, cash strapped enterprise customers are kept sticky with bundled business services to aid SMEs operating as smoothly as possible without much added cost.

Post-update, we leave our assumptions unchanged.

Maintain OUTPERFORM and TP of RM4.95. Our DCF assumptions consist of WACC of 7.8% with a terminal growth of 1.5%. In addition to the abovementioned prospects, we anticipate investors to take more kindly to fixed line/broadband operators given the intensifying competition within the mobile space. As the group also aims to be more yield-driven, investors might consider accumulating now at “cheaper” levels. 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 out 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 - 13 Oct 2020