Kenanga Research: "Telekom Malaysia remains our favourite pick for the sector."
KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Telekom Malaysia with an unchanged discounted cashflow (DCF) based target price of RM6.70.
It said on Tuesday Telekom’s move to raise broadband speeds for the same price would limit upselling in the near term.
It added that it was too early to assume big hit in the average revenue per user (ARPU) in 2019 while the packages could include more VAS.
CIMB Research said TM’s CEO Tan Sri Zamzamzairani, CFO Datuk Bazlan and EVP of Consumer & SME Imri Mokhtar hosted a conference call on Monday afternoon to address concerns about the government’s Budget 2017 proposals for fixed broadband services.
Last Friday, the government announced that fixed line broadband service providers will offer services at a higher speed for the same price, effective January 2017. It also proposed that broadband speeds be doubled in two years while prices halved.
About 500,000 UniFi home customers (across its VIP and Advance Plans) will enjoy upgrades to the next speed tier in phases, starting in Jan 2017. Of the balance 400,000 UniFi customers, 120,000 already received free speed upgrades earlier this year, while plans for the remaining 280,000 (largely SMEs) have not been finalised.
For non-UniFi subs, TM plans to announce a new package with greater value by year-end.
“TM sees a few potential positives in greater value packages: a) lower subs churn to other fixed broadband and LTE-based mobile broadband service providers, b) more Streamyx subs could upgrade to UniFi, and c) with the faster speed, more subs could take up video-on-demand services (iFlix, Viu) that TM sells.
“TM does not expect major capex and opex impact from this, except for Customer Premise Equipment (CPE) upgrades for certain customers to support higher speeds.
“We believe capex would be in line with its previous plans for rollout of High Speed Broadband Phase 2 (HSBB2), Suburban Broadband (SUBB) and 4G-LTE network,” it said.
CIMB Research pointed out that on the issue of 50% price cut in 2019, TM says it is still in discussions with the government and it is too early to talk about how this would be executed.
Nevertheless, TM's presentation emphasised that current prices per Mbps have fallen by as much as 75%-78% since the initial launch of UniFi services in 2010.
“TM also said that this issue should not be seen from just one angle. The 50% price cut is purely for connectivity and over time, the revenue composition would shift from connectivity to value-added services (VAS, e.g. content and security services),” it added.
CIMB Research thinks the Budget 2017 proposal to upgrade broadband speeds for the same price could cap upselling opportunities for TM in the next one to two years. However, the research house makes no adjustments to our earnings forecast, as it is currently factoring in only
+1.3%/+0.3%/+0.1% increase in UniFi ARPU in 2016/17/18F.
“At this stage, we think it would be too premature to assume a direct price cut that impacts ARPU significantly in 2019. Discussions with the government on how (and the exact criteria) to meet the Budget 2017 objectives have just begun.
“We believe TM could potentially maintain ARPU by bundling in more VAS and that it will focus on the issue of affordability and pricing per Mbps in its discussion with the government,” it said.
CIMB Research noted that due to the high capex, TM’s FY17F EV/OpFCF of 22.1 times is at 56% premium to the Asean telco average but is supported by decent yields of 3.2-3.4% p.a.
“Upside risks are stronger-than-expected UniFi growth and Webe turning profitable earlier than expected. Downside risk: higher-than-forecast Webe losses in the short term,” it added.
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