CIMB Research retains hold for Telekom at RM4.30

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KUALA LUMPUR: CIMB Equities Research is maintaining its hold call for Telekom Malaysia (TM) with an unchanged target price of RM4.30 and it awaits the finalisation of wholesale highspeed broadband (HSBB) prices. 

It said on Wednesday its target price was based on a 10% discount to its discounted cashflow based valuation of RM4.80.

TM currently trades at an FY19F enterprise value/operating free cashflow (EV/OpFCF) of 21.5 times, or a 54% premium over the Asean telco average. 

“If TM has to eventually lower its unifi broadband prices by 25% from FY19 onwards, we estimate its DCF value will fall to RM3.15. Key upside/downside risks: unifi mobile reachesbreakeven faster than expected/retail HSBB prices fall by more than 25%,” it said.

On Tuesday, TM announced it will launch an entry-level 30Mbps unifi broadband-only plan priced at less than RM100 a month for B40 households (monthly income: RM3,900 or less) from mid-July 2018. This is more than 40% lower vs. its current 30Mbps plan (inclusive of TV and fixed voice).

TM also promised to “more than double” speeds for existing unifi customers starting Aug 15, 2018. 

“We gather that TM may also upgrade speeds (where technically possible) for existing Streamyx subs, although there is unlikely to be a B40 offering,” it said.

TM revised its 2018 KPIs: a) revenue growth: -1% to flat, EBIT: c.RM1bn and capex/sales: 20-22%. Previously, it was 3.5-4.0% revenue growth, steady EBIT (FY17: RM1.2bil) and 25-30% capex/sales. TM’s dividend policy is unchanged.

“TM’s share price could react positively today as the market may see its announced plans as sufficiently meeting the government’s agenda while keeping the earnings impact manageable,” it said.

CIMB Research believes B40 households do not currently form a significant portion of TM’s unifi subs base. As such, offering a 30Mbps plan for less than RM100/month to the group
should have a minimal impact on TM’s existing unifi revenue.

Meanwhile, the free speed upgrades for existing unifi subs should also have little impact on TM’s capex, as reflected by its revised guidance. TM says it has sufficient network capacity (including submarine cables) to cater for this.

Although TM’s overall broadband subs have been declining since 2Q17, revenue continues to grow, largely driven by: a) the sizeable ARPU uplift from subs that upgrade from Streamyx (ARPU: RM90) to unifi (ARPU: RM194), and b) unifi subs upgrading to higher speed plans.

With the free speed increases planned for Streamyx/unifi subs and some Streamyx subs eligible for the unifi B40 plans, there may be a lower propensity for subs to further upgrade to higher speed plans. 

Consequently, TM’s broadband revenue growth could slow down to flat to low-single-digit going forward. However, this is still way better than the scenario of falling broadband revenue due to big retail price cuts.

CIMB Research pointed out that while the government is receptive towards TM’s plans to upgrade speeds and offer an entry-level unifi plan for B40 households, the reduction in HSBB wholesale prices is still on the cards, following the implementation of the Mandatory Standard on Access Pricing (MSAP) on June 8. 

It was previously reported that TM and access seekers (e.g. Maxis, Celcom, etc.) are currently in commercial discussions to finalise wholesale prices by July/August.

“This remains a key risk factor. If retail service providers (that buy wholesale from TM) lower their fibre broadband prices, TM may need to eventually extend its price cuts to the non-B40 segments as well in order to defend its subs base,” it said.
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