This article first appeared in The Edge Financial Daily on February 25, 2020

Telekom Malaysia Bhd
(Feb 24, RM3.75)
Maintain hold with an unchanged target price of RM3.90: Sluggish net adds and a market share loss in the fixed broadband market will be a drag on Telekom Malaysia Bhd (TM) in the near term, even though we remain positive about its medium-term prospects under the five-year RM21.6 billion National Fiberisation and Connectivity Plan (NFCP).

TM is guiding for a low- to mid single-digit decline in financial year 2020 (FY20) revenue, as it expects the industry to continue to adjust to new market dynamics and declining revenue from the traditional segment. Its FY20 earnings before interest and tax (Ebit) guidance of more than RM1 billion is quite wide, considering the company reported RM1.7 billion normalised Ebit for FY19. Capital expenditure as a percentage of revenue is expected to be in the low- to mid-20s.

TM reported a core net profit of RM190 million (-34% quarter-on-quarter) for the fourth quarter ended Dec 31, 2019 (4QFY19) taking FY19 core earnings to RM1 billion which accounted for 97% and 102% of our and consensus full-year forecasts respectively. Major one-off items incurred in 4Q included a RM234 million write-down on the fair value of exchangeable medium-term notes.

On a full-year basis, unifi and TM ONE’s revenue fell by 11% and 4% year-on-year respectively for FY19, given the decline in broadband prices as well as the lower information and communications technology spending by businesses. This was partially mitigated by the 19% growth at TM Global.

We expect the RM21.6 billion NFCP project to be a potential catalyst for TM, given the substantial funding to the tune of RM10 billion-RM11 billion from the government over five years. This could help accelerate TM’s high-speed broadband network roll-out, especially to suburban and rural areas to achieve the NFCP’s key targets (faster, wider coverage and affordability). Besides, TM also aspires to be a wholesale infrastructure provider for fifth-generation network, and is looking to bid for the 700MHz and 3.5GHz spectrums once the spectrum auction process is initiated by the Malaysian Communications and Multimedia Commission. — AllianceDBS Research, Feb 24