​Macquarie Equities Research (MQ Research) released a report last night, upgrading Telekom Malaysia (TM) to an Outperform rating from Neutral on the proposed infrastructure model based on its recent discussions with various telcos.  MQ Research increased TM’s target price to RM4.27 as it is convinced that TM will be one of up to two wireless infra providers in Malaysia’s 5G future.

Event

• MQ Research upgrades an recommendation on Telekom Malaysia from Neutral to Outperform, with an increased price target of RM4.27 (prev RM3.85), following discussions with representatives from various telcos on the proposed infrastructure model TM’s management put forward at its recent meeting. MQ Research’s assessment is that TM will become one of up to two wireless infrastructure providers for 5G and in either case will be the key provider of the fibre infrastructure required to support the wireless layer(s). The Malaysian Communications and Multimedia Commission’s (MCMC) decision on spectrum allocation expected by end 2019 will set the tone. While financial details are scarce, MQ Research sees the risk reward for TM skewed to the positive at this point, and valuations at 5.3x 20E enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) are undemanding in MQ Research’s view.

Impact

• Industry players prefer shared infra model. Representatives from various telcos MQ Research spoke to were unanimously supportive of an infrastructure type model, although opinions on the execution and structure of the model were varied. The two potential outcomes are that the 700MHz spectrum is allocated 1) in its entirety to TM or 2) two blocks of 20MHz each to TM and another (mobile) player. TM’s fibre (already covered under the MSAP) will be the key provider of backhaul. In MQ Research’s view with TM’s social agenda to provide coverage nationwide, there is a good chance that it would tap the USP Fund to provide the incremental coverage and attract a fair share of mobile operators onto its network.

• Financials variable. The cost of building such a network remains elusive and depends on the spectrum allocation, according to management, which in turn determines the scope of the network. The range is wide based on MQ Research’s discussions with a high of approximately RM5bn as a start.

• T&Cs important. IF TM is the sole provider for wholesale wireless capacity, MQ Research would expect that it is excluded from the retail market to avoid moral hazards. Alternatively, the network would be carved out as a regulated asset earning a regulated return, with rollout determined by the regulator with inputs from the mobile players and other stakeholders.

Earnings and Target Price Revision

• 19/20/21E core profit est +0.9/-3.5/-1.9%; target price up to RM4.27 on lower beta 1.1x

Price Catalyst

• 12-month price target: RM4.27 based on a discounted cash flow (DCF) methodology.
• Catalyst: MCMC decision on broadband spectrum allocation by end 2019.

Action and Recommendation

• Upgrade from Neutral to Outperform.

12-month Target Price Methodology

• TM MK: RM4.27 based on a DCF methodology

Source: Macquarie Research - 11 Oct 2019