Telekom Malaysia - OUTPERFORM - 27 June 2012

Telekom Malaysia (“TM”) remains our top pick in the Telecommunication sector. While competition in the FTTH segment has intensified, we are of the view that it will benefit TM’s wholesale ultimately due to its backhaul provider status even though the margin is not as lucrative as the retail segment. TM as well as the other industry players have shown interest to participate in the DTTB plan rollout. Although there is no detail business plan being unveiled at this juncture, we believe the rollout could potentially provide an additional income source to the successful bidder in the long run. Our view on TM is that it will declare another capital initiative plan in FY12 remains unchanged judging from its healthier cash flow and lower capex trend. The downside risk on our assumption is the additional capex required should TM manage to seal the DTTB project. We are maintaining our OUTPERFORM rating on TM with an unchanged target price of RM6.36, based on a targeted FY13 EV/forward EBITDA  of 7.3x (+2.0x SD). 

Competition in the FTTH segment intensified but will benefit TM ultimately.  The rationale of the recent aggressive fibre-to-the-home (“FTTH”) marketing campaign launched by Maxis is to create product awareness rather than a price war in our view. In fact, we were told by industry sources that the other key reason for the  aggressive promotion campaign by Maxis is to meet the minimum subscribers’ number, which is one of the key terms and conditions (T&Cs) set under the HSBB wholesale agreement. We believe that similar T&Cs may be applied to the other HSBB collaboration agreements inked after Maxis, and thus we will not be surprised to see occasionally aggressive promotions being launched by other HSBB counter parties in the future. Despite competition in the home broadband segment intensifying, this will still benefit TM’s wholesale business ultimately given that the company serves as a backhaul provider to these HSBB access seekers.     

      

Interested to participate in the digital terrestrial television broadcasting (“DTTB”) rollout.  MCMC has lately issued a request for proposal (RFP) for the DTTB system, which is a plan to convert the current analogue broadcast system into a digital format, with submissions due on July 25. We understand that TM as well as the other industry players are showing their interests on the project and are currently evaluating the RFP. Media news had earlier reported that the DTTB project, including the entire infrastructure and set-top boxes, was estimated to cost RM1.0b. While there is no detail business plan unveiled at this juncture, we believe that the plan could potentially provide an additional income source to the successful bidder in the long run.    

TM’s retained earnings remains strong at RM2.6b  even after its proposed capital repayment plan of RM1.07b (or 30.0 sen/share) announced in conjunction with its 4Q11 result. The  proposed capital repayment, which has received the approval of shareholders, is expected to be completed in 3Q12 upon getting the approval/consent from the High Court and TM’s creditors/lenders. The group has reiterated its commitment to return excess cash to shareholders should there be no additional capex required by the company. In view of its declining capex trend (which we forecast at RM2.6b, RM2.3b and RM1.9b for FY12, FY13 and FY14, respectively), we believe TM is well capable to further reward shareholders on top of its total regular annual dividend per share of 19.6 sen. We are keeping our FY12 dividend forecast of 49.6 sen unchanged.  

Source: Kenanga