This article first appeared in The Edge Financial Daily on June 27, 2018 - July 3, 2018

Telekom Malaysia Bhd
(June 26, RM3.06)
We maintain our “buy’ call with an unchanged forecast and fair value of RM4.90/share based on an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of five times for the financial year ending Dec 31, 2018 (FY18), which is 0.4 times of Singapore Telecommunications Ltd’s 14 times.

Fitch Ratings has downgraded Telekom Malaysia Bhd’s (TM) credit outlook to negative from stable while reaffirming its long-term foreign-currency issuer default rating and senior unsecured rating at “A-” due to Ebitda pressure, continuing high capital expenditure (capex)/dividend commitments, and the government’s plan to lower fixed broadband prices by 25% by the end of this year.

Telekom, which met the communications and multimedia ministry and the Malaysian Communications and Multimedia Commission last week, plans to announce details about its initiatives on affordable broadband services at higher speed within the next quarter. It also reiterated its support of the government’s aspiration regarding affordable broadband services at higher speeds to increase its competitiveness.

Recall that the plan to reduce broadband pricing stems from the mandatory standard on access pricing, which sets the wholesale price ceiling that can be charged by service providers.

One option to mitigate the impact would be to adjust the permutation of price to speed offerings, as Telekom’s price/speed is much higher compared to Time dotCom’s.

Telekom’s lowest unifi monthly package of RM129 for speed of 10 megabits per second (Mbps) translates into RM12.90 per Mbps, 8.7 times compared with Time dotCom’s RM1.49 per Mbps (RM149 at 100Mbps).

Based on unifi’s 1.2 million customers and average revenue per user of RM194 per month in the first quarter ended March 31, 2018 (1QFY18), we estimate that this division’s annualised revenue could reach RM2.7 billion, excluding Streamyx customers which could account for another RM1.2 billion.

Under the worst-case scenario, a 25% reduction in unifi revenue alone could potentially wipe out almost 90% of Telekom’s FY19 forecast earnings.

Including a similar reduction in Streamyx revenue, it will translate into a slight loss for Telekom. Hence, we believe the government will be receptive to a lower price to speed offerings as a drastic revenue cut could derail the group’s capex roll-out programme under the high-speed broadband 2 drive to connect suburban and rural areas, impeding plans to provide Internet access throughout Malaysia.

We highlight that Telekom is Malaysia’s sole national operator of fixed telephony and broadband while Time dotCom provides fibre-optic connectivity limited to high-rise, population-dense and commercial centres.

In our view, the worsening credit outlook and revenue pressures will eventually lead the path towards sector consolidation and a potential remerger with the Axiata Group. — AmInvestment Bank Bhd, June 26