Telekom Malaysia (“TM”) - FTTH battle in 2013

Telekom Malaysia remains our top pick in the telecommunication sector. The intensifying competition in the home broadband segment is well within TM’s expectations as the company has been planning for this by signing a few HSBB agreements with its peers since FY11, which have since gone on to launch their respective home fibre plans.  Management believes it will still be able to enjoy a healthy growth and continue to gain market  share here due to its first-mover advantage. Customers retention remains its key focus and TM believes by that best way to retain its customers is by adding more value-added services to its current packages. The recent partnership between Maxis and Astro may  provide a real competition to TM’s Unifi in CY13, in our view, should the joint parties offer home broadband services at a competitive price with rich contents. In view of the reducing trend in its HSBB capex requirement, TM is targeting to lower its capex spending from RM2.6b in FY12 to RM2.3b in FY13 and to RM1.8b thereafter. We reiterate our view that TM is likely to declare another capital initiative plan in FY12 given its healthier cash flow and lower capex trend. We are maintaining our OUTPERFORM rating on TM with an unchanged target price of RM6.45, based on  a targeted FY13 EV/forward EBITDA of 7.6x (+2.0 SD).

Customers retention remains its key focus in Unifi. The intensifying competition in the home broadband segment is well within TM’s expectations as the company has been planning for this by signing a few HSBB agreements with its peers since FY11, which have since gone on to launch their respective home fibre plans. While management believes that it still has the first-mover advantage in the short to medium term, the group’s emphasis on customers retention as its key focus in FY12 remains unchanged. TM has introduced myTMRewards, where users can use the points earned to offset some of their outstanding bill amounts, a few quarters ago and intends to provide more value-added services (“VAS”) under its current packages instead of compromising on its subscription fees and margins. TM believes this is the most effective way to retain its clients given that there will be a large group of Unifi subscribers who are due to renew their 2-year contracts in 2013.

IPTV and VAS battles are the key. The partnership between Maxis and Astro may provide a real competition to TM’s Unifi in CY13 should the joint parties offer its home broadband services at a competitive price with rich contents. While the details of the joint packages have yet to be unveiled, we believe that the price will likely be set at around RM250/month, which is similar to that currently being offered by Time dotCom and Astro in their joint packages, we believe the real battle is likely come from the IPTV and VAS segments rather than on broadband speed given that Maxis is riding on TM’s HSBB backhaul. Moving forward, TM intends to educate and create more awareness on its HyppTV to uplift its ARPU. We understand that TM has allocated about RM130m in FY12 to enrich its HyppTV contents.    

FY13-FY14 capex guidance.  Management does not foresee any major capex spending during the next 1-2 years. While TM is maintaining its FY12 capex guidance at RM2.6b, the group is targeting to lower its capex to RM2.3b in FY13 (of which RM1.0b is allocated for the HSBB service) and thereafter to RM1.8b in FY14 (50% each for both HSBB and BAU services), in line with its reducing HSBB capex requirement. The company’s FY13-FY14 capex guidance is within our expectation as we have already earlier imputed RM2.3b and RM1.9b into our FY13 and FY14 forecasts.   

Source: Kenanga