TM (4863) - Telekom Malaysia - Lower ARPU May Encourage Greater Cost Cutting Efforts




According to the Communications and Multimedia Minister Gobind Singh, broadband users should expect prices to fall by at least 25% by end-2018. This follows the implementation of the Mandatory Standard on Access Pricing (MSAP) by the Malaysian Communications and Multimedia Commission (MCMC). Telekom Malaysia (TM) should post lower ARPU as a result but we also expect subscriber base to rise as prices become more affordable. In addition, we believe this could prompt TM to be more aggressive in implementing cost-cutting measures in order to grow its bottomline. All in all, we cut our FY18-20F earnings forecasts by 6-20% after taking into account a lower ARPU, higher customer base and lower operating costs. Consequently, our DCF-based TP is reduced from RM5.60 to RM4.65. We believe TM’s share price is pricing in a more destructive cut in broadband prices as it is trading near -1SD of 19x forward PER (Table 1). Although there could still be room for further reduction in broadband prices, we expect it to be implemented gradually as the new government has not committed on a timeframe in executing a 50% cut in prices stipulated in its election manifesto. We maintain our Trading Buy call on TM.



    Broadband prices to fall by 25% by end of the year. As part of Pakatan Harapan’s election manifesto, the new government is partially fullfiling its promise with the announcement of a 25% reduction in broadband prices by end-2018. The Communications and Multimedia Minister said relevant parties are currently in discussion to finalise the wholesale prices and this is expected to conclude by July/August, after which new lower-priced broadband packages are expected to be rolled out to consumers.

    Lower ARPU for TM but… This will result in lower ARPU for TM’s broadband products. For FY18-20F, we forecast 8-30% reduction in TM’s ARPU but we also expect subscriber base to increase due to a more affordable pricing. We forecast Unifi subscriber base to expand by 15% p.a (previously we assumed single-digit growth). Given a subdued revenue growth, we believe TM’s management will be more aggressive in implementing cost rationalisation measures in order to deliver earnings growth beyond FY19F. We reckon areas for cost efficiency improvement include direct and manpower cost, which accounts for 40% of total cost. Taking into account all these, our FY18F, FY19F and FY20F earnings forecasts are reduced by 6%, 20% and 19%. As such, our TP is revised down to RM4.65.

Source: PublicInvest Research - 21 Jun 2018

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