INVESTMENT HIGHLIGHTS

• TM introducing new broadband plan for the B40 segment while increasing the existing broadband speed at the same price point

• The moves conform to the government initiative of making internet services more accessible to the masses

• Negativity surrounding the broadband pricing has been priced in

• Difficult for the group to maintain its dividend policy given the challenging market environment

• Revert to NEUTRAL with unchanged target price of RM3.02

Revision in broadband plan. Telekom Malaysia Bhd (TM) is introducing a new affordable entry level unifi package at 30Mbps only for the B40 segment at a price point below RM100. The pricing is more than 40% below the existing 30Mbps package. For the M40 and T20 segment, TM will gradually upgrade the broadband speed at more than double the speed while maintaining the respective price point. Meanwhile, for new customers subscribing to existing unifi plans before 31st December 2018 will also be upgraded accordingly in 2019. For preunifi customers, TM will introduce special package upgrade. On a separate note, existing TM customers will also be offered ‘unlimited’ unifi Mobile postpaid plan.

Lowering headline KPI. Telekom Malaysia Bhd (TM) is revising downwards 2018 headline KPIs given the evolving market dynamics and operational environment.

Meeting the manifesto. The introduction of new broadband package for the B40 and upgrading of the broadband speed conform to the Pakatan Harapan Manifesto. While we expect little impact from the launch of new entry level unifi plan, we do not discount the possibility that the existing customer base from the M40 and T20 segments to downgrade their respective broadband plans, should they do not require such speed. On a separate note, we expect muted impact from the relaunching of ‘unlimited’ unifi mobile postpaid plan as similar offering can be found from its peers. For instance, U mobile launched ‘Giler Unlimited’ postpaid plan for RM50/mth which offer unlimited data and unlimited calls to all networks.

Impact. No change to our earnings estimates at this juncture.

Dividend. The group maintained its stance that it will adhere to its dividend policy of distributing RM700m or up to 90% of normalised PATAMI, whichever is higher. However, we are of the view that it would be difficult for the group to maintain the dividend policy given in the long term due to the weak cash generating ability and dwindling cash reserve. Note that as at 1Q17, the group’s cash balance stands at RM1,426.m.

Target price. We are maintaining our target price of RM3.02. This is based on Dividend Discount Model valuation methodology.

Revert to NEUTRAL. We view that the market has reacted to the development surrounding the broadband price. On a year-to-date basis, the share price has retraced by -46.3%ytd. As such, we view that the negativity has been priced in. Moving forward, we expect challenging market environment will continue to negatively impact the group’s voice, data and other revenues. Moreover, we remained concerned on the group’s ability to manage its operating expenses efficiently. The cost as a percentage of revenue has increased steadily beyond 90% for the past few quarters. Due to the earnings pressure and the group’s commitment capex commitment for long-term growth, we expect it would difficult for the group to maintain its current dividend policy. All factors considered, we are reverting our call recommendation to NEUTRAL from sell previously.

Source: MIDF Research - 4 Jul 2018