Stable growth in fixed-line business

Maintain BUY; RM7.20 TP. The recent weakness in Telekom Malaysia (TM)’s share price seems to reflect concerns over government initiatives to reduce fixed broadband prices. However, we believe this has been overdone given that: 1) TM does not tend to cut prices outright (instead, it offers more value for its plans); and 2) negotiation with the government is still on-going. We remain optimistic that the rollout of the High- Speed Broadband Phase 2 (HSBB2) project, Sub-Urban Broadband (SUBB) project, and Webe mobile services would drive long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas. Maintain BUY with RM7.20 TP.

Details still sketchy for broadband price reduction. TM said the ‘50% reduction in broadband prices over two years’ might be only applicable to the connectivity portion of its triple-play services. As such, the price points of its Unifi packages may not necessary be significantly lower in the future as TM could mitigate this by bundling its packages with higher speed as well as more value-added services.

Webe:full steam ahead. Webe was officially launched to the public in September. To attract more subscribers, TM is currently running a promotional offer for its unlimited postpaid plan for RM79/month, regardless whether they are existing P1/TM broadband customers and using smartphones that are compatible with 850MHz LTE (to be eligible for the discounts). Besides postpaid, Webe is looking to introduce prepaid plans, possibly by 2H17.

Valuation

Following the earnings cut, our DCF-based TP for TM is revised lower to RM7.20, assuming 8.0% WACC and 1.5% terminal growth. Maintain BUY call as we still like TM for the stable growth of its fixed-line business

Key Risks to Our View

Regulatory risks. TM is subject to regulatory risks, such as mandatory access pricing, for example. The regulators also have the power to mandate an organisational split between its wholesale and retail divisions in order to promote fair market practice, if required.

Source: Alliance Research - 28 Nov 2016