TM (4863) - Telekom Malaysia Bhd (TM) - Cheaper Broadband Price Ahead

Broadband price is expected to drop at least 25% by year- end, post the implementation of the Mandatory Standard on Access Pricing. While the details of the commercial discussions have yet to be ironed out, Telekom Malaysia (TM) is set to be on the losing end. All in, we keep our FY18-19E earnings forecasts unchanged for now but lowered our DCF-driven target price to RM3.70.

Cheaper broadband price by year-end. The authority has revealed that the price of broadband services in Malaysia is expected to go down by at least 25% by the end of 2018. This follows the implementation of the Mandatory Standard on Access Pricing (MSAP) by the Malaysian Communications and Multimedia Commission (MCMC) on June 8. In general, MSAP determines the ceiling wholesale price for operators which subsequently affect the retail price that end-users pay for their broadband service. Indeed, the revised prices should have come into effect on January 1 2018 but has been postponed as TM had appealed to MCMC to reconsider its position on some of the pricing components.

Commercial discussions have yet to be finalised. While the relevant parties are still holding commercial discussions to determine the wholesale prices, the final decision is expected to be concluded by the July/August, according to the Minister. Subsequently, new lower- priced broadband packages are expected to be rolled out to consumers by year-end.

Consumers – the ultimate winner. Despite the details of the broadband wholesale and retail price yet to be determined; one can see that government is working towards achieving its election manifesto – double the broadband speed at half the price. Having said that, at present it still remains vague whether the broadband initiative would be applied across the board or only for subscribers who sign up the upcoming new lower-priced broadband packages. No matter which decision are made by the authority/broadband service providers, consumers will be the ultimate winner.

Hard landing for TM. With the review of the broadband wholesale access pricing coupled with the retail broadband packages, the group’s data (which include the domestic leased bandwidth and other data services) and internet (which comprise of Unifi and Unifi mobile) segments are set to be checked. Note that, the Data/Internet segments contributed 22%/36% (FY17: 22%/33%) to the group’s total turnover of RM2.48b in 1Q18. For illustration purpose, should the wholesale access pricing and the broadband retail price are cut by 25%, TM’s turnover is expected to be reduced by 3.5-13.7% in FY18-19E. Assuming a similar net profit margin of 5.7-6.3%, its FY18-19E net profit will be lowered to RM645-655m (or -4.0%/-13.4%), respectively.

Maintain MARKET PERFORM but with lower DCF-driven TP of RM3.70. Despite keeping our FY18-19E numbers unchanged for now (pending the detailed outcome of the commercial discussion), there is a higher risk for earnings to be revised downwards post the completion of the commercial discussions. Thus, we have lowered our DCF-driven TP to RM3.70 (from RM4.35 previously) post revising our WACC assumptions to 8.4% (vs. 7.8% previously) to account for the earnings risk ahead.

Source: Kenanga Research - 21 Jun 2018