Telekom Malaysia Bhd
(Feb 8, RM6.01)
Maintain hold call with a lower target price (TP) of RM6.10: We expect Telekom Malaysia Bhd’s (TM) fourth quarter of 2016 (4QFY16F [forecast]) revenue to rise 10% to 12% quarter-on-quarter (q-o-q), down 1% to 2% year-on-year (y-o-y) due to seasonally stronger revenue from data services and information and communications technology (ICT) projects. However, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin could ease 1% to 2% points q-o-q to some 31% due to higher marketing costs, normalising bad debts and higher ICT project-related costs. We project core earnings per share (EPS) growth of 13% to 15% q-o-q, driven by Ebitda growth and tapering of webe’s depreciation and impairment. Based on a 90% payout, we forecast final dividend per share  of some 10 sen.

We cut core EPS by 7.5% in the FY16F but raise EPS by 0.9% and 1.7% in the 2017 and 2018 financial years for lower depreciation, partly offset by higher taxes. Post-revision, we expect FY16F core EPS to fall 10.6% y-o-y due to greater webe losses and interest costs. We forecast FY17F and FY18F core EPS growth of 8.8% and 7.8% respectively based on revenue growth of 2.5% and 2.2% (ex-webe) with solid revenue growth for managed accounts, and lower webe losses from impairment.

We do not expect the speed upgrades for UniFi Home subscribers to incur high operating or capital expenditure as TM’s ports are already 100 megabits per second (Mbps)-capable and only a small group of subscribers will require equipment upgrades. Based on our external sources, Streamyx and existing 100Mbps UniFi subscribers will not receive speed upgrades, but will get free HyppTV content or a RM10 discount if they subscribe to webe. We expect this to lower subscribers’ demand for upgrades to higher speeds, limiting UniFi average revenue per unit (Arpu) uplift in FY17 and FY18 forecasts.

We believe the best-case scenario is that TM meets the Budget 2017’s proposal by launching an entry-level package or offering further speed upgrades. To be prudent, our base-case scenario assumes that the 50% price cut is applied to the connectivity portion of UniFi Home packages, effectively lowering the FY19F Arpu by 20%. In our worst-case scenario, UniFi Home plan prices will be cut by 50%, but we think this is unlikely to occur.

The negative impact from the price cut could be mitigated by the fact that UniFi Home revenue would only account for some 40% of total broadband revenue, which in turn would comprise 34% of TM’s total revenue in the FY18F. Hence, our base-case assumptions result in a 2.9%, 6.2%, and 17.8% hit to TM’s revenue, Ebitda and core EPS respectively in FY19, and our worst-case estimates a bigger negative impact of 7.3%, 15.5%, and 44.5% respectively.

We maintain a “hold” call on TM with a 9% lower discounted cash flow-based TP of RM6.10, after factoring in an effective 20% cut in UniFi Home Arpu from FY19F. TM’s FY17F enterprise value over operating free cash flow ratio of 20.1 times is at a 21% premium over the Asean telco average, but is supported by decent dividend yields of 3.2% to 3.8% per annum in FY16 to FY18. The upside risk is that webe turns profitable earlier, whereas the downside risk is a 50% cut being applied to headline broadband prices. — CIMB Research, Feb 7