Telekom Malaysia Bhd
(Oct 16, RM2.58)
Maintain sell with a lower target price (TP) of RM2.25: The government seeks to heighten competition in the telecommunications sector (as reported by The Edge Financial Daily) and foreign telecommunication companies have expressed interest to participate in the local fibre fixed-broadband market, said The Malaysian Reserve. The threat of possible new entrants (that is Tenaga Nasional Bhd, local companies with foreign tie-ups and international companies), and intensifying competition among the existing broadband service providers (that is TIME and Maxis) should challenge Telekom Malaysia Bhd’s (TM) market dominance and profitability.
Unifi prices have likely stabilised; Streamyx prices are at risk. Following a 39% reduction in Unifi’s basic package price and the upgrading of broadband speed, we do not expect further cuts in broadband package prices over the next few quarters. However, we see a downside risk to Streamyx package prices, of which TM had yet to make any reduction. It was reported that Communications and Multimedia Minister Gobind Singh Deo wants to immediately tackle issues concerning Streamyx.
High operating leverage — revenue slips to hit earnings hard. We cut our financial year 2018 (FY18) to FY20 estimate core earnings per share forecasts by 6% to 18% after imputing lower Unifi prices, higher advertising and promotion (A&P) expenses and weaker subscriber growth of 1% (from 2%). We forecast TM’s 2019 to 2020 estimate revenue to decline about RM900 million to RM1 billion from the 2016 to 2017 (pre-broadband price cut) level of RM12.1 billion. Constrained by its high fixed costs and finance charges, the revenue dip should have a material impact on its earnings and dividend per share.
We maintain our “sell” rating on TM with a lower discounted cash flow-derived TP of RM2.25 (from RM3) after incorporating our earnings cut and a higher risk premium of 8.2% (from 7.4%). Derating factors include a potential Streamyx price cut, consensus earnings cut and a possible exclusion from the FBM KLCI Index. Upside risks are a robust broadband average revenue per user, strong subscriber growth and material decline in operating costs. — Affin Hwang Capital Research, Oct 16