Incumbent fixed operator, Telekom Malaysia Bhd's entry into 4G market may put more pressure on mobile phone operators.
KUALA LUMPUR: CIMB Equities Research is maintaining its Hold call for Telekom Malaysia (TM) with a lower target price of RM4.95 compared with its earlier target of RM6.10.
It said on Tuesday the new government’s election manifesto poses some uncertainties on broadband prices.
The research house expects mobile network-related costs to rise as TM accelerates its LTE network rollout. This would be partly buffered by lower staff cost as well as digitisation of its business.
“FY18F capex to rise 14% due to mobile & ICT investments, then ease in FY19-20F. Post-earnings cut, core EPS to fall 3.4% in FY18, then rise 4.5%/11.9% in FY19F/20F,” it said in a research note.
CIMB Research said TM will continue to offer affordable broadband plans for targeted groups in phases, e.g. students, online SMEs.
While the new government’s election manifesto includes a pledge to halve broadband prices and double speeds, “we believe it is still too early to tell what will happen”.
One factor that the government needs to consider before pushing for lower prices is TM’s relatively low EBITDA margin due to its high staff cost.
“TM is trying to contain the rise in domestic roaming fee paid to Celcom by rolling out its LTE network more widely, re-negotiating the roaming rate and structuring its data passes with a LTE-3G quota split.
“Nevertheless, we see rising mobile network-related cost pressures in FY18-19F due to a greater number of LTE sites. Thereafter, we expect unifi mobile losses to narrow towards EBITDA breakeven in 2021,” it said.
It pointed out unifi mobile, as well as TV, is part of TM’s convergence strategy to increase its share of household spend.
On its workforce, 1,800 TM staff (7% of total) will naturally retire in 2018-20, five years after the private sector retirement age was raised from 55 to 60.
“Hence, we see staff cost easing from 20.7% of sales in FY17 to 18.9% by FY20F,” it said.
TM is also taking other cost saving initiatives, e.g. adopting a more digital approach in delivering services and engaging with its customers, to help buffer the mobile cost pressures.
“We see EBITDA margin at c.29% to 30% (2017: 30.4%) in FY18-19F, then to rise as unifi mobile losses narrow.
“We see TM's FY18F capex rising 14% to RM3.1bn (capex/sales: 25.5%) due to HSBB2/ SUBB and accelerated LTE network rollouts, plus investments in ICT infrastructure (e.g. data centre, cloud platform).
“With the completion of HSBB2 and the Klang Valley Data Centre (KVDC) this year, we expect capex to taper off from FY19 with capex/sales at 20.8% by FY20F, in line with TM targets.
“We cut our FY18-20F core EPS by 5.0-10.8%, factoring in lower revenue across the board, lower EBITDA margin and higher depreciation (on higher capex).
“We now see TM’s core EPS easing 3.4% in FY18, then rising 4.5%/11.9% in FY19F/20F. Based on 90% payout ratio, we forecast FY18-20F DPS at 20.0-23.4 sen (previous: 21.5-26.1 sen), which implies decent 4.1-4.8% yield,” said CIMB Research.
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