Macquarie Equities Research (MQ Research) wrote a report (14 Jan) on Telekom Malaysia (TM) after its recent discussions with industry players on the proposed 5G consortium model. As the industry is still discussing the 5G’s progress, TM maintains its focus on playing in the wholesale infrastructure and suburban broadband segments. MQ Research has raised TM’s net profit estimates for FY19/20/21 and its target price to RM4.43 from RM4.27.

Event

• MQ Research reiterates an Outperform recommendation on TM following discussions with industry players on the proposed 5G consortium model. In summary it appears that the industry is still in discussions on how to progress and ultimate consortium members. It appears that progress is being made but a final outcome is still weeks away, in MQ Research’s view. For TM, the focus remains on playing in the wholesale infrastructure and suburban broadband segments, with mobile operators providing the mobility/capacity elements. Operationally management is focused on getting the basics right to deliver returns on its existing business.

Impact

• Wholesale focus in 5G. TM’s focus in 5G has been to provide a baseline service/coverage utilising lower frequency bands eg 700MHz. This would fulfil the suburban/rural broadband coverage initiative of the NFCP (National Fibrerisation and Connectivity Plan) and allow it to provide IoT services to enterprise customers. This suggests that forming a consortium with mobile operators who would be focused on the capacity/throughput of the 3.5GHz, should not be difficult. The devil will be in the details around ownership of the consortium, network rollout plans and the rules of engagement for all parties.

• Getting the basics right. In the meeting with TM’s management, it was clear that outside of the infra story, they are focused on “fixing the basics” of network, marketing and customer service/perception. Efficiency gains will be derived but it doesn’t look like there will be significant moves in margins from here. MQ Research has adjusted its forecasts to impute the savings achieved in 9M19, but believes that an uptick in activity levels into 2020 will put pressure on margins. Nonetheless, MQ Research expects margins to improve thereafter.

Earnings and target price revision

• MQ Research raises its FY19/20/21 core net profit estimates by 26.2/4.1/4.4% to incorporate faster than expected cost savings as evidenced in 9M19. MQ Research’s discounted cash flow (DCF) derived price target is increased from RM4.27 to RM4.43 as a result.

Price catalyst

• 12-month price target: RM4.43 based on a DCF methodology.
• Catalyst: 4Q19 results in late February and confirmation of 5G agenda in 2Q19

Action and recommendation

Outperform maintained. TM remains MQ Research’s top pick in the Malaysian telecoms space. Further clarity on its wholesale agenda should provide greater long term cashflow and earnings visibility which should also provide dividend upside in, MQ Research’s view. Valuations at 6x adjusted for FY21E enterprise value (EV)/earnings before interest tax, depreciation and amortization (EBITDA) with a 3% dividend yield are more compelling than mobile peers.

12-month target price methodology

• T MK: RM4.43 based on a DCF methodology