This article first appeared in The Edge Financial Daily, on 30 November, 2015.

Telekom Malaysia Bhd
(Nov 27, RM6.60)
Maintain buy call with a lower target price (TP) of RM7.50: We trim our forecast financial year ending Dec 31, 2015 (FY15F) to FY17F earnings per share (EPS) by 4% to 8% to account for the higher taxation.

Our revised RM7.50 TP is based on a discounted cash flow valuation assuming 8.3% weighted average cost of capital and 1.5% terminal growth.

Telekom Malaysia Bhd (TM) recorded third quarter ended Sept 30, 2015 (3QFY15) core net profit of RM200 million (up 4% year-on-year [y-o-y]), taking nine-month period ended Sept 30, 2015 (9MFY15) earnings to only 61% of our full-year forecast, slightly below our expectations.

At 67% of consensus full-year estimates, this should be roughly in line with expectations given that TM typically reports a better 4Q because of lumpy customer projects.

The key variance was the higher effective tax rate of 33% (as a percentage of normalised profit before tax) because TM has yet to recognise the corresponding tax losses or deferred tax asset arising from the losses at Packet One Networks (M) Sdn Bhd (P1).

The management expects this to continue for the next 12 to 24 months.

For 9MFY15, P1 had a revenue of RM177 million, but suffered operating losses of RM186 million.

TM added 11,000 new UniFi subscribers in 3QFY15, taking its subscriber base to 793,000 (up 13% year-on-year).

Average revenue per user saw some uptick to RM192 (from RM190 in 2QFY15) due to a healthy take-up rate of premium HyppTV services and higher-priced packages.

TM has recently refreshed its UniFi packages, offering higher speeds at incremental prices.

The entry-level package now has a six-time-faster download speed of 30Mbps (from 5Mbps) at an effective monthly price of RM169 (up from RM149). 

Subscribers are required to take up HyppTV packs priced at between RM30 and RM60 per month for at least one year, but are given RM20 rebates during the current promotion period.

TM has finalised negotiations with the government on the RM3.4 billion high-speed broadband Phase 2 and suburban broadband projects, and is only waiting for the official signing.  We expect this to drive further growth for TM as it rolls out high-speed network coverage in more areas.

The acquisition of P1 (which owns LTE [long-term evolution] spectrum) will open up a new addressable market for TM in the mobile segment, especially in data where TM can leverage on its superior fixed-line network.

P1 is already rolling out its LTE network as well as negotiating with other mobile operators to seal domestic roaming agreements. It will start to conduct user trials and network readiness test in December 2015, followed by services launch in 2016. — AllianceDBS Research, Nov 27