This article first appeared in The Edge Financial Daily on April 17, 2020

Telekom Malaysia Bhd
(April 16, RM3.96)
Maintain outperform with an unchanged target price (TP) of RM4.30: After our conference call with the management, we see a possible short-term risks for Telekom Malaysia Bhd (TM) from the ongoing movement control order (MCO) — losing customers mainly small and medium enterprises (SMEs) with its capital expenditure (capex) plans shifting to ensure network quality from a surge in usage.

That said, TM’s continual cost rationalisation could mitigate earnings pressure with its fifth-generation (5G) ambitions still much alive. At the current market capitalisation, TM seems poised to re-enter the FBM KLCI in the upcoming June review. Our “outperform” rating and discounted cash flow-driven TP of RM4.30 are maintained.

The MCO has led to TM Point outlets’ closure nationwide, prohibiting over-the-counter customer registration and payments. This resulted in higher online registrations, albeit installation works for new customers could only commence once the MCO is lifted.

So far, the group has not offered discounts to customers, with SMEs seeking deferments of payment. With economic activities at a standstill, it is not implausible to expect growing default risks and a loss of subscribers in this customer group.

The management also cited its cost of offering free channel access to its Unifi television viewers is immaterial. Also, continual cost-saving initiatives — contract renegotiations and manpower rationalisation — should keep its profit afloat despite top-line risks.

The MCO has also led TM to refocus its capex plan to be more backhaul-based to keep up with rising Internet usage. The management added that RM10 million of the RM400 million mentioned in the government stimulus has been allocated for this purpose. This shift could lead to a revision in guided capex spending for the year — a low- to mid-20% of revenue — which could be further aggravated by possible MCO extensions.

With priorities shifted, it is probable that the earlier National Fiberisation Connectivity Plan target of offering entry-level broadband packages at RM40 per month may not materialise this year, probably to TM’s benefit as it puts off dilution risks to its household subscribers.

That said, if it materialises, we believe it would not be substantial enough to negatively impact the group, given its targeted rural or low-income areas which may not see a high take-up.

Also, the current developments appear to have put the national 5G roll-out on hold, with risks of delaying the earmarked commercialisation timeline in the third quarter of 2020. We viewed that regardless of any given structure — consortium or not, and the award and allocation of spectrum, we believe TM still plays a meaningful role in 5G’s eventual roll-out, given its extensive fibre network.

After updates, our assumptions are unchanged for now, pending updates on the management’s guidance in conjunction with the first quarter of financial year 2020 results reporting on May 21, 2020.

Despite a guarded near-term outlook, we believe TM still offers solid long-term prospects helmed by its leaner cost structure and solid case for a role in 5G. Further, given a shake-up in the existing market, a high possibility arises that TM is poised for a reinclusion in the KLCI in the June review. This could be a strong positive rerating catalyst for the stock.

Risks to our call include a weaker-than-expected voice and Internet demand, a stronger-than-expected operating expenditure and a stiffer competition. — Kenanga Research, April 16