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This article first appeared in The Edge Financial Daily on June 22, 2018

Telekom Malaysia Bhd
(June 21, RM3.14)
Downgrade to sell with a lower target price (TP) of RM3.02:
Broadband users should expect prices to fall by at least 25% by the end of the year, according to Communications and Multimedia Minister Gobind Singh Deo. This follows the implementation of the Mandatory Standard on Access Pricing by the Malaysian Communications and Multimedia Commission on June 8. At present, the relevant parties are currently in commercial discussions to finalise the wholesale prices. The lowering of wholesale prices should translate into lower retail prices for consumers.

 

We are negative on the news. This means that we can expect broadband average revenue per user (Arpu) to reduce toward the end of 2018. This will negatively impact the group’s revenue. While Telekom Malaysia Bhd may expedite its cost savings initiative, we doubt the group may reduce its operating costs to make up for the reduction in broadband prices.

To be on the conservative side, we are cutting financial year 2018 (FY18) and FY19 earnings estimates downward by -1.7% and -10.4% respectively as we reduce our broadband Arpu assumptions to reflect the government initiative to make Internet services more accessible to the masses.

Following our earnings downgrade, we derive a lower TP of RM3.02 (previously RM4.09). This is based on dividend discount model valuation methodology. Note that we are also reducing the terminal growth to 4.5% from 5% in view of the challenging telecommunication landscape. — MIDF Research, June 21

 

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