AmInvest Research downgrades Telekom to Hold, eye on higher expenditure

According to AmBank Research, competition in the local cellular telco segment is expected to remain intense over the medium term, as repackaged data plans make their way to the market while the fixed broadband segment is expected to see rising pressure to improve price and speed.

KUALA LUMPUR: AmInvestment Research has downgraded its call on Telekom Malaysia (TM) to Hold from Buy with unchanged forecasts and discounted cashflow based fair value of RM4.08 a share.

It said on Tuesday TM’s share price has surged by 50% to near its fair value since its upgrade on May 30 this year following the strong 1QFY19 results outperformance, which was driven by a surprisingly sharp 18% year-on-year drop in operating costs.

Recall that this was supported by the group’s transformative Performance Improvement Programme, an ongoing initiative that was 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 writebacks for cost provisions incurred last year, we remain wary of seasonally higher cost expenditures towards 2HFY19. 

“We highlight that the group’s 1QFY19 capex, which halved YoY to RM151mil, accounted for only 5.4% of revenue vs. management’s FY19F guidance of 18%,” it said.

AmInvest Research said in its view, the agenda to implement cost efficiency initiatives remain the key the TM’s prospective earnings recovery given that the decline in Streamyx customers has more than offset unifi increases consecutively since 2QFY17.

It pointed out 1QFY19 Streamyx users shrank by 7% QoQ and 23% YoY to 872,000 while recruitment rates for new unifi customers rose by only 2% QoQ and 12% YoY to 1.3 million. 

“Hence, FY19F revenue outlook remains flattish with the decline in unifi’s average revenue per user expected the taper off due to most of the customers opting for faster speed packages,” it said.

AmInvest Research said the recent appointment of Datuk Noor Kamarul Anuar Nuruddin as TM’s new managing director/group chief executive officer provides some reassurance to policy continuity as Imri Mokhhtar, the former acting CEO, resumes his previous role as the chief operating officer.

“However, we are cautious on the new strategic direction which Kamarul could be embarking on following TM’s impressive cost cutting performance in 1QFY19 albeit briefly under Imri’s management,” it said.

Kamarul was formerly Celcom’s chief technology officer responsible for its network strategic plan, later chief information technology and transformation officer, and then chief carrier collaboration officer managing collaborations with domestic network facilities providers, telcos and celcos, foreign cellular operators, as well as international carriers for roaming and traffic services.

TM 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%.
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