Telekom Malaysia - Dialing a Larger Number

  BUYFAIR VALUE: MYR7.00

We are raising our FY12/13 core earnings forecasts for TM by 22-24% on the back of (i) a lower projected depreciation expense, (iii) higher growth assumed for its ICT related business (BPO and cloud computing projects under VADS), (iii) the continuing robust Unifi take-up, and (iv) an improved margin outlook as HSBB spending eases. Despite the 27% YTD share price gain, which has been driven by investors flocking to safer haven investments, we believe there is further upside from the likelihood of better earnings going forward and an increase in TM’s dividend payout. Our FV is upgraded to RM7.00, from RM5.90 previously, based on revised 7x FY13 EV/EBITDA (6x previously). TM remains our top Malaysian telco pick.

Superior growth. TM will release its 1HFY12 results on 29 Aug followed by an investor conference call. We do not foresee any surprises, with stronger revenue and EBITDA envisaged both y-o-y and q-o-q after a seasonally weak 1Q. We think management’s FY12 revenue growth KPI of 5% is conservative as the group dialed in strong 11% y-o-y growth in 1QFY12, driven by the double-digit expansion of the internet and data businesses and the good operational traction recorded by its business process outsourcing (BPO) division under VADS. TM’s wholesale revenue contribution (<10% of group revenue) should see a pick-up in momentum from 2QFY12 following the launch of Maxis’ and P1’s Fiber to the Home (FTTH) services which ride on its HSBB network. We expect management to declare an interim DPS of 10sen/share for FY12. TM paid dividend of 30sen/share in mid-August as part of its earlier capital distribution exercise.    

Competition is good. Despite the threat from Maxis’ FTTH service and similar products by Celcom and P1, we are not overly concerned as the market for FTTH is growing. TM also enjoys the first mover advantage and has a more visible brand. TM’s Unifi has been a runaway success with over 420k installations to-date, representing 34% of fiber enabled premises in the country. We believe it netted over 71k new Unifi subscribers in 2Q12, off the high of 79k recorded in the March quarter as Maxis launched its service at a heavily discounted price to create awareness. While Maxis has since revised its prices higher, its packages are perceived to offer a bigger bang for the buck due to the more generous bandwidth provided. We gather from channel checks that the order backlog for Maxis has extended to three months as it is not able to ramp-up installation capacity to meet the strong demand. We are retaining our assumptions of 500k Unifi subscribers by end-2012 and expect some updates on the competitive landscape at the results call.   

Expect fresh dividend policy. We expect TM to review its dividend payout policy as core earnings are projected to surpass the RM700m level for FY12, the minimum level (or 90% of core profit whichever is higher) that it would pay under the current policy.

Source: OSK