Telekom Malaysia - Unifi subscriber target raised Buy

- We re-affirm our BUY call on Telekom Malaysia, with a higher DCF-derived fair value of RM6.70/share (vs. RM5.90/share previously) as we roll over our valuation base to FY13F. 

- TM reported a core net profit of RM223mil for its 2Q12, which brought 1H12 core earnings to RM406mil. The 1H12 earnings were broadly within expectations, accounting for 55% of our FY12F net profit and 53% of consensus. Meanwhile, normalised EBITDA of RM1.6bil accounted for 49% of our FY12F projection and consensus. 

- Earnings grew 22% QoQ, led by growth in Internet services. Unifi subscriptions grew 22% QoQ, but there was a slight (-1% QoQ) contraction of Streamyx subscriber base. Unifi subscriber net additions in 2Q12 slowed slightly to 22,760/month versus 26,415/month in 1Q12. Latest Unifi subs stood at 420K (33% take-up rate), which means that TM has exceeded its original target of 400K subs. Management has now set a new target of 500K subs by end-FY12F, which is in-line with our projection. 

- ARPU growth potential is not limited to just migration to Unifi, but also via enhanced packages for Streamyx subscriptions. Notably, Streamyx ARPU rose 3% YoY to RM79 in 1H12 (from RM77 in 1H11). Nonetheless, 30% of existing Unifi subs (ARPU: RM181) migrated from Streamyx. This was a notable increase versus a 20% proportion a year ago.

- Margins remained steady at close to 33% (EBITDA margin) despite Maxis’ aggressive pricing strategies during the early phase of its home fibre broadband launch in 2Q12. However, we believe competition will likely heat up going forward, given new fibre broadband offerings by TM’s wholesalers e.g. Maxis and Green Packet. In the July till end-August period, Unifi subs net addition declined further to circa 18K/month, though this has to be taken into context with the festivities and shorter working month in August. 

- Management indicates of possibly better receivable collections in 2H12, which may improve operating cashflows. However, no exact measure or target was forthcoming. Additionally, there is no indication yet of 2013 HSBB capex (as TM enters a demand-driven rollout phase). We model in declining capex for FY13F to RM2.1bil (from RM2.6bil in FY12F), which translates into 14sen/share savings. 

- On an EV/EBITDA basis, TM is cheap (FY13F: 7.7x) relative to mobile telco peers, i.e. Maxis: 11x and DiGi: 12x. We believe capex intensity may also peak in FY12F as major towns have been covered in the initial HSBB rollout phase which ends in FY12F – which suggests potential surprise dividends going forward.  

Source: AmeSecurities