TM (4863) - Outperform Reiterated for Telekom

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Following the Malaysian Communications and Multimedia Commission’s (MCMC) decision to regulate prices for broadband access from 8 June, Macquarie Equities Research (MQ Research) analysed the potential pricing pressure on Telekom Malaysia (TM) and the impact of a lower network roll-out cost, in its report released yesterday (5 Jul). MQ Research reiterates its outperform call on TM with the same target price of RM5.40.
Event

    MQ Research analysed the regulated prices for broadband access as announced by the MCMC which took affect 8 June and conclude that the pricing pressure in retail broadband, while existent, is limited, based on TM’s recently outlined new price plans. They believe that over time, lower roll-out costs from better procurement exercises will help the nation see lower broadband costs, while fixed wireless broadband will help raise rural broadband penetration. Meanwhile, TM’s shares at 6.5x EV-to-trough EBITDA (19E) offer good value with an attractive 5.3% dividend yield.

Impact

    Wholesale discount not as significant as market fears. MQ Research analysed the MCMC’s Review of Access Pricing document dated 20 December 2017 and concluded that the price differential between wholesale costs and TM’s proposed new price plans are not significant enough to create intense price competition. By their estimates, the cost of a wholesale line to an access seeker is RM92/month and RM136/month for 30Mbps and 100Mbps service, respectively. This compares with TM’s proposed     Bringing down roll-out costs helps lower broadband costs. Industry players generally agree that the cost of laying fibre in Malaysia is high due to the small number of licensed contractors. Raising these numbers would aid bringing down costs. Any move by the government to utilise the RM8.5bn USP fund would also go a long way in bringing down costs over time.



Earnings and Target Price Revision

    No change.

Price Catalyst

    12-month price target: RM5.40 based on a discounted cash flow (DCF) methodology.
    Catalyst: Proof of costs controls and improved cash flows in coming quarters.

Action and Recommendation

    Outperform reiterated.

Source: Macquarie Research - 6 Jul 2018

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