This article first appeared in The Edge Financial Daily on June 26, 2019
Telekom Malaysia Bhd
(June 25, RM4.15)
Downgrade to hold with an unchanged fair value (FV) of RM4.08: We downgrade our call on Telekom Malaysia Bhd (TM) to “hold” from “buy” with unchanged forecasts and a discounted cash flow (DCF)-based FV of RM4.08 per share, based on a weighted average cost of capital of 7.3% and a terminal growth rate of 2%, which implies financial year 2020 forecast (FY20F) enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of five times.
Its share price has surged by 50% to near our FV since our upgrade on May 30 this year following TM’s strong first quarter of FY19 (1QFY19) result outperformance, which was driven by a surprisingly sharp 18% year-on-year (y-o-y) drop in operating costs.
Recall that this was supported by the group’s transformative Performance Improvement Programme, an ongoing initiative carried out since mid-2018 that has led to cost optimisation in contract renegotiation, marketing, business procurement, manpower and unifi Mobile’s domestic roaming operations.
While management indicated no significant 1QFY19 write-back for cost provisions incurred last year, we remain wary of seasonally higher cost expenditures towards the second half of FY19. We highlight that the group’s 1QFY19 capital expenditure, which halved y-o-y to RM151 million, accounted for only 5.4% of revenue versus management’s FY19 guidance of 18%.
In our view, the agenda to implement cost-efficiency initiatives remain the key to TM’s prospective earnings recovery given that the decline in Streamyx customers has more than offset unifi increases consecutively since 2QFY17.
Its 1QFY19 Streamyx users shrank by 7% quarter-on-quarter (q-o-q) and 23% y-o-y to 872,000, while the recruitment rate for new unifi customers rose by only 2% q-o-q and 12% y-o-y to 1.3 million. Hence, its FY19 revenue outlook remains flattish with the decline in unifi’s average revenue per user expected to taper off due to most of the customers opting for faster-speed packages.
Meanwhile, the recent appointment of Datuk Noor Kamarul Anuar Nuruddin as TM’s new managing director and group chief executive officer (CEO) provides some reassurance about policy continuity as Imri Mokhhtar, the former group acting CEO, resumes his previous role as the chief operating officer.
However, we are cautious about the new strategic direction which Noor Kamarul could be embarking on following TM’s impressive cost-cutting performance in 1QFY19, albeit briefly under Imri’s management.
Noor Kamarul was formerly Celcom’s chief technology officer responsible for its network strategic plan, later the chief information technology and transformation officer, and then the chief carrier collaboration officer managing collaborations with domestic network facility providers, telecommunication companies and cellular communication companies, foreign cellular operators as well as international carriers for roaming and traffic services.
The stock currently trades at a fair FY19F EV/Ebitda of six times, slightly below its three-year average of 6.9 times, while offering a decent dividend yield of 4%. — AmInvestment Bank, June 25