This article first appeared in The Edge Financial Daily on July 16, 2018

Telekom Malaysia Bhd
(July 13, RM3.62)
Maintain hold with a lower target price (TP) of RM3.55: Telekom Malaysia Bhd’s (TM) existing unifi Home subscribers will see an eight to 10 times speed upgrade (subject to technical availability) for the same price starting mid-August 2018, with the lowest-end package at RM129 for 100Mbps.

A broadband-only 30Mbps plan (with a 60GB monthly quota) will be offered to the bottom 40% households (with RM4,500 monthly income or below) for RM79 per month.

Its 340,000 Streamyx subsribers will be migrated to unifi (100Mbps) for free. TM will also double the speed of the remaining 350,000 Streamyx subscribers (due to infrastructure limitations).

Based on the current wholesale high-speed broadband (HSBB) prices under the Mandatory Standard for Access Pricing (effective June 2018), we believe external retail service providers (RSPs) may not be able to compete effectively versus TM after the latter’s eight to 10 times speed upgrade.

However, there is still risk that these RSPs will appeal to the regulator for a review of wholesale HSBB prices. If successful, more players could enter the market, resulting in increased price competition.

A quick 25-person survey showed that about 50% of respondents planned to keep their existing plans to enjoy the eight to 10 times speed upgrade, while the rest planned to downgrade to the RM129 per month plan for 100Mbps.

Based on this and the average subscription fee in the survey, we estimate the blended unifi Home average revenue per user (Arpu) may fall by about 15%. The percentage of down traders may be lower if service termination and recontracting are a major hassle, and TM counter-offers with free content/other value-added services.

We cut our financial year ending Dec 31, 2018 (FY18) to FY20 core earnings per share (EPS) forecasts (which had previously not factored in any price cuts/down trading) by 0.5% to 22.8%.

This assumes that unifi Home Arpu drops by a blended 15% over the next two years (given the timing of contract renewals). For existing Streamyx subscribers, we assume no Arpu uplift going forward as they will be upgraded to unifi (where possible) for free.

We have also reduced our capital expenditure (capex)-to-sales assumption to about 20% across the 10-year discounted cash flow (DCF) period, following TM’s FY18 guidance of 20% to 22%.

Post our revisions, we forecast TM’s core EPS to decline by 15.7%/15.8% year-on-year in FY18/FY19 before rising 8.6% in FY20 due to a recovery in information and communications technology revenue and narrowing of unifi Mobile losses.

We keep our FY18 dividend per share forecast at 18.6 sen, as per TM’s guidance, but lower it to 14.7 sen and 15.9 sen for FY19 and FY20 respectively, assuming a 90% payout ratio. TM’s net debt/earnings before interest, taxes, depreciation and amortisation is around 2.1 times to 2.2 times across FY18 to FY20.

We lower our DCF-based TP by 17% to RM3.55 (weighted average cost of capital: 7.2%) following our earnings and capex revisions.

TM trades at FY19 enterprise value/operating free cash flow of 22.6 times, or a 59% premium to the average of Asean telcos.

Our dividend yield forecast is 5.4% for FY18, before falling to a still decent 4.2% and 4.6% for FY19 and FY20 respectively.

Key upside/downside risks: unifi Mobile turning profitable sooner than expected/keener broadband price competition if mandatory wholesale HSBB prices are lowered. — CGSCIMB Research, July 13