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This article first appeared in The Edge Financial Daily on February 28, 2019

Telekom Malaysia Bhd
(Feb 27, RM2.96)
Maintain trading buy with a target price (TP) of RM3.60:
Telekom Malaysia (TM) reported a net profit of RM69.7 million in fourth quarter financial year 2018 (4QFY18), recovering from a loss of RM175.6 million in 3QFY18 that was mainly due to an impairment loss relating to its wireless and fixed network assets.

For the current quarter, there was an additional impairment of RM48 million. Stripping out this and other non-operating items, normalised 4QFY18 net profit fell 53% year-on-year (y-o-y) to RM104.9 million following the implementation of the mandatory standard of access pricing (MSAP).

For full-year FY18, normalised net profit of RM632.4 million (-26.7% y-o-y) was within our expectation but slightly above market estimates of RM598.5 million.

Our FY19 to FY20 forecast earnings estimates are increased marginally by 1% to 2% due to housekeeping changes. TM declared a two sen cash dividend, which works out to be about 50% of normalised net profit, in line with the management’s guidance of 40% to 60%.

The group’s FY18 revenue was down 3.5% y-o-y due to lower contribution from data, Internet and multimedia as well as non-telecommunication-related services. Data revenue fell 7.1% y-o-y to RM664 million due to the implementation of MSAP while other revenue dropped 7.9% y-o-y to RM614 million on lower property contribution and lower tuition fees. Average revenue per user for unifi was lower at RM184 compared with RM197 in 4QFY17. Meanwhile, the subscriber base increased 15.3% y-o-y to 1,298,000.

Also, the normalised net profit dropped 53% y-o-y due to the impact of MSAP on wholesale pricing, of which TM has recognised a provision of RM36.8 million (FY18: RM169.2 million).

As for provision on impairment of fixed and wireless network assets, an additional sum of RM48 million was recognised in the current quarter (FY18: RM982.5 million). Note that these provisions have narrowed in 4QFY18.

For 2019, we believe there will be no further pressure on broadband pricing as the communications and multimedia ministry has indicated its satisfaction of the price cut that took place in 2018. Therefore, we expect TM’s wholesale income to stabilise in FY19F, following the sharp decline in FY18.

TM intends to dispose of two office towers (20-storey and 33-storey) that have a combined gross floor area of 679,015 sq ft in Pantai Baru, Kuala Lumpur.

Assuming a selling consideration of RM1,100 per sq ft (psf) to RM1,200 psf, which is based on the market value of commercial properties in the surrounding areas, the sale of these towers could potentially raise RM747 million to RM815 million for the group.

Based on our estimate, this would help reduce its gross debt to earnings before interest, taxes, depreciation and amortisation from 2.4 times to 2.2 times.

Nevertheless, given the oversupply condition in Kuala Lumpur’s property market, we opine that it will be a challenge for TM to dispose of these properties at market value. We note that the 20-storey tower was purchased in 2005 at RM65.8 million. — PublicInvest Research, Feb 27

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