From recent meetings in Hong Kong and Malaysia, we gather that investors are increasingly pricing in a potential downside in TM’s earnings. The group faces headwinds from: i) new IPTV entrants, ii) margin pressure from higher content cost & the expiry of equipment warranties, and iii) potentially unfavorable regulatory developments. We lower our FV to RM6.20 (from RM7.00) after cutting our core earnings estimates for FY12/13 to build in higher opex and lower subscriber growth for Unifi in 2013. The upside risks to our forecast are the stronger-than-expected EBITDA margin and earnings going forward. TM’s share pricehas fallen by 14% over the past month on the back of the sector’s de-rating. At current levels, there is still more than 10% upside to our revised FV. Maintain BUY.
Investor meetings. We recently brought TM to Hon Kong as part of the Invest Malaysia Hong Kong (IMHK) corporate series. The telco met up with a good number of investors, comprising both long and hedge funds. The discussions were centered on i) M&A plans, ii) the procurement of additional content, and iii) dividend prospects. While TM has denied submitting a bid for a WiMAX provider, it is open to strategic collaborations and acquisitions that could add value to its fixed broadband business. We expect TM to tread M&A opportunities carefully as not to compromise on its balance sheet and capital management headroom. On the Barclays Premier League (BPL), TM was keen to lodge an independent bid but decided otherwise after evaluating other content options on the table. There was no specific guidance on special dividend payouts although we think TM may re-guide the market post the announcement of its FY12 results in Feb 2013, where it will also unveil a new set of KPIs.
Unifi growth to decelerate further in 3Q. TM conducted a clean-up of its Unifi base in 2Q/3Q2012, which would crimp subscriber growth in 3Q12. The exercise is intended to expunge delinquent customers. We estimate subscriber net-add decelerated further to 45k-50k in 3Q2012 from 68k in 2Q12 and 79k in 1Q12, with August being a shorter month due to festive closures and the school holidays. That said, gross add number continued to be strong at 900-1000/day despite competition from Maxis. TM should be on track to meet its target of 500k Unifi customers by year-end. On the 33k customers coming to the tail-end of their 24 month contracts, TM said it has good loyalty benefits to retain these customers.
Business trust and regulatory developments. TM do not discount the possibility of transferring related network assets to a business trust to unlock their values but we think this may not be high on its agenda compared to the mobile operators where benefits are more discernible. We believe the eventual revelation of the wholesale access pricing framework by the regulator could impact TM as it is the incumbent fixed broadband operator and the government is keen to promote further competition.
Investor meetings. We recently brought TM to Hon Kong as part of the Invest Malaysia Hong Kong (IMHK) corporate series. The telco met up with a good number of investors, comprising both long and hedge funds. The discussions were centered on i) M&A plans, ii) the procurement of additional content, and iii) dividend prospects. While TM has denied submitting a bid for a WiMAX provider, it is open to strategic collaborations and acquisitions that could add value to its fixed broadband business. We expect TM to tread M&A opportunities carefully as not to compromise on its balance sheet and capital management headroom. On the Barclays Premier League (BPL), TM was keen to lodge an independent bid but decided otherwise after evaluating other content options on the table. There was no specific guidance on special dividend payouts although we think TM may re-guide the market post the announcement of its FY12 results in Feb 2013, where it will also unveil a new set of KPIs.
Unifi growth to decelerate further in 3Q. TM conducted a clean-up of its Unifi base in 2Q/3Q2012, which would crimp subscriber growth in 3Q12. The exercise is intended to expunge delinquent customers. We estimate subscriber net-add decelerated further to 45k-50k in 3Q2012 from 68k in 2Q12 and 79k in 1Q12, with August being a shorter month due to festive closures and the school holidays. That said, gross add number continued to be strong at 900-1000/day despite competition from Maxis. TM should be on track to meet its target of 500k Unifi customers by year-end. On the 33k customers coming to the tail-end of their 24 month contracts, TM said it has good loyalty benefits to retain these customers.
Business trust and regulatory developments. TM do not discount the possibility of transferring related network assets to a business trust to unlock their values but we think this may not be high on its agenda compared to the mobile operators where benefits are more discernible. We believe the eventual revelation of the wholesale access pricing framework by the regulator could impact TM as it is the incumbent fixed broadband operator and the government is keen to promote further competition.
KEY HIGHLIGHTS
We recently brought TM to Hong Kong as part of Invest Malaysia Hong Kong (IMHK) and also hosted a few other group meetings with local investors. TM was represented by Datuk Bazlan Osman, its Executive Director/Group CFO and Head of Investor Relations, Rohaila Basir. The group met over 15 fund managers and investors in Hong Kong over a full day of meetings.
Open to M&As. TM said it is open to strategic collaborations and potential acquisitions should they add value to its overall fixed broadband business. The group is likely to tread M&A opportunities carefully as not to compromise on its balance sheet and capital management headroom. While TM recently dismissed media reports of a bid for P1, a WiMAX operator, we do not rule out the possibility as P1 would provide access to the valuable 2.3GHz and 2.6GHz/LTE spectrum which would further complement TM’s triple play aspirations. In our view, the acquisition would also circumvent additional competition from mobile operators. We note with interest the P1 CEO was also formerly the CEO of TM Net, TM’s subsidiary overlooking its broadband business. P1 would benefit from TM’s stronger branding, marketing, distribution platform and access to content while TM would be able to capitalize on P1’s expanding nomadic coverage and its strength within the SME market.
Vying for content that is not value destructive. We believe TM has explored the submission of an independent bid for the 2013-2016 BPL rights. However, it decided against making a bid after taking into account commercial considerations and evaluating other content options. We would have viewed it negatively should TM put in a value destructive bid. The number of Unifi customers and the modest take-up of premium content (25% of its base) may not justify an iconic investment just yet in our view. TM is also mindful of Astro, the incumbent holder of the rights, which it believes will go all out to defend the exclusivity. Astro reportedly coughed out RM1bn for the rights, a substantial sum considering that TM had budgeted less than RM200m for content in FY12. Content spending totaled RM43m in 1HFY12.
BPL for Unifi subscribers if TM has its way. We think TM may be able to procure the rights to air BPL matches if the Malaysian Communications and Multimedia Commission (MCMC) decides to introduce a more cohesive form of content sharing. The government may be compelled to level the access to popular content after receiving complaints from Unifi subscribers who felt shortchanged from the recent ‘black-out’ of the Piala Malaysia final match on TM’s HyppTV by another pay-tv provider. The action was perceived as an attempt to prevent viewers from watching the match via Unifi.
The MCMC had earlier this year ruled that certain sports content of national significance be offered to other pay-tv providers on reasonablecommercial terms if they are not taken up by free-to-air (FTA) operators who shall have the first rights of refusal. We think TM could also be looking to ring-fence other sports content to preempt competition from Maxis, which is set to roll out its IPTV in 1Q2013 with Astro. TM recently added Fox Sports and three Chinese channels, bringing its total channel line up to 100, which includes 42 pay per view channels and 17 video-on-demand channels. We are not overly concerned about the entry of Asian Broadcasting Network (ABN) as we think its coverage will be limited in the initial years as most compelling content already procured by Astro and TM.
We recently brought TM to Hong Kong as part of Invest Malaysia Hong Kong (IMHK) and also hosted a few other group meetings with local investors. TM was represented by Datuk Bazlan Osman, its Executive Director/Group CFO and Head of Investor Relations, Rohaila Basir. The group met over 15 fund managers and investors in Hong Kong over a full day of meetings.
Open to M&As. TM said it is open to strategic collaborations and potential acquisitions should they add value to its overall fixed broadband business. The group is likely to tread M&A opportunities carefully as not to compromise on its balance sheet and capital management headroom. While TM recently dismissed media reports of a bid for P1, a WiMAX operator, we do not rule out the possibility as P1 would provide access to the valuable 2.3GHz and 2.6GHz/LTE spectrum which would further complement TM’s triple play aspirations. In our view, the acquisition would also circumvent additional competition from mobile operators. We note with interest the P1 CEO was also formerly the CEO of TM Net, TM’s subsidiary overlooking its broadband business. P1 would benefit from TM’s stronger branding, marketing, distribution platform and access to content while TM would be able to capitalize on P1’s expanding nomadic coverage and its strength within the SME market.
Vying for content that is not value destructive. We believe TM has explored the submission of an independent bid for the 2013-2016 BPL rights. However, it decided against making a bid after taking into account commercial considerations and evaluating other content options. We would have viewed it negatively should TM put in a value destructive bid. The number of Unifi customers and the modest take-up of premium content (25% of its base) may not justify an iconic investment just yet in our view. TM is also mindful of Astro, the incumbent holder of the rights, which it believes will go all out to defend the exclusivity. Astro reportedly coughed out RM1bn for the rights, a substantial sum considering that TM had budgeted less than RM200m for content in FY12. Content spending totaled RM43m in 1HFY12.
BPL for Unifi subscribers if TM has its way. We think TM may be able to procure the rights to air BPL matches if the Malaysian Communications and Multimedia Commission (MCMC) decides to introduce a more cohesive form of content sharing. The government may be compelled to level the access to popular content after receiving complaints from Unifi subscribers who felt shortchanged from the recent ‘black-out’ of the Piala Malaysia final match on TM’s HyppTV by another pay-tv provider. The action was perceived as an attempt to prevent viewers from watching the match via Unifi.
The MCMC had earlier this year ruled that certain sports content of national significance be offered to other pay-tv providers on reasonablecommercial terms if they are not taken up by free-to-air (FTA) operators who shall have the first rights of refusal. We think TM could also be looking to ring-fence other sports content to preempt competition from Maxis, which is set to roll out its IPTV in 1Q2013 with Astro. TM recently added Fox Sports and three Chinese channels, bringing its total channel line up to 100, which includes 42 pay per view channels and 17 video-on-demand channels. We are not overly concerned about the entry of Asian Broadcasting Network (ABN) as we think its coverage will be limited in the initial years as most compelling content already procured by Astro and TM.
Unifi growth to slow further in 3Q. TM conducted a clean-up of its Unifi base, which would have a negative impact on its subscriber growth in 3QFY12. The exercise is intended to address delinquent customers. We estimate subscriber net-add decelerated further to 45k-50k in 3Q2012 from 68k in 2Q12 and 79k in 1Q12, with August being a short month due to festive closures and the school holidays. It has signed up close to 460k subscribers as at mid-November. We understand Unifi gross subscriber adds remained robust at 900-1000/day despite competition from Maxis.
Our on the ground checks indicate that some users are holding out for better packages to be unveiled by Maxis (bundled IPTV content from Astro), which will pit its plans directly with Unifi. We think TM is watching Maxis closely now that the pricing gap on equivalent packages has narrowed (see our report on Maxis dated 22 Oct titled ‘Narrowing the Pricing Gap’). TM believes in giving out more for the same price and will continue to place strong emphasis on customer service. On the potential churn arising from subscribers (totaling 33k) reaching the tail-end of their 24 month contracts, TM said it intends to further lock-in these subscribers via attractive retention benefits.
Our on the ground checks indicate that some users are holding out for better packages to be unveiled by Maxis (bundled IPTV content from Astro), which will pit its plans directly with Unifi. We think TM is watching Maxis closely now that the pricing gap on equivalent packages has narrowed (see our report on Maxis dated 22 Oct titled ‘Narrowing the Pricing Gap’). TM believes in giving out more for the same price and will continue to place strong emphasis on customer service. On the potential churn arising from subscribers (totaling 33k) reaching the tail-end of their 24 month contracts, TM said it intends to further lock-in these subscribers via attractive retention benefits.
Moving up the dividend curve. After monetizing various non-core assets over the past three years and actively managing its working capital, TM’s ability to pay out special dividends going forward would now be based upon a more effective management of its capex given that HSSB (high speed serial bus) spending will start to level off from FY13. While management has maintained its dividend policy of ‘RM700m or 90% of core PATAMI, whichever is higher’ in place since 2008, we believe TM would have to re-guide investors on its dividend outlook as its FCF yield is building up, increasing to 7%-8% in FY13/14 from under 5% in FY11. We believe there is still headroom for capital management given that TM’s gross debt/EBITDA of 2.1x is still below its longer-term target of 2.5x.
Vast ICT potential. TM sees strong potential within the business process outsourcing (BPO) space in Malaysia and will be looking to increase its revenue contribution from this segment, which currently accounts for <10% of revenue. The BPO business is undertaken by its wholly-owned subsidiary, VADS. It aspires to be a medium for exchange, being an enabler and information aggregation point for customers. TM indicated it would provide more details on the potential of the ICT business when its 2013 business plans are finalized.
Vast ICT potential. TM sees strong potential within the business process outsourcing (BPO) space in Malaysia and will be looking to increase its revenue contribution from this segment, which currently accounts for <10% of revenue. The BPO business is undertaken by its wholly-owned subsidiary, VADS. It aspires to be a medium for exchange, being an enabler and information aggregation point for customers. TM indicated it would provide more details on the potential of the ICT business when its 2013 business plans are finalized.
Playing an indirect role in DTTB. We understand that TM did not submit a bid for the digital terrestrial television broadcasting (DTTB) project as it sees more value as a service provider as opposed to taking the lead role as a turnkey contractor to manage the country’s migration to digital broadcasting. The project involves the construction of a common integrated infrastructure comprising transmission, network and multimedia broadcasting hub, for which TM may not want to commit unnecessary resources. We expect TM to play an indirect role in the project as the owner of transmission towers which would be utilized for the broadcasting of digital content. The DTTB contract specifications also include the provision of set-top boxes to consumers.
3Q12 results preview. TM will announce its 9MFY12 results on 30 Nov to be followed by an investors’ conference call. We expect its revenue to grow 2%-4% q-o-q (+6%-9% y-o-y), driven by its internet and data segments, while voiced revenue should stay relatively subdued. Although likely to see a deceleration, TM’s YTD revenue growth should still tracked ahead of its low-balled 2012 revenue growth KPI of 5% (1HFY12 revenue growth of 9.8%). We expect the group to report flattish EBITDA on higher content and maintenance costs, which allude to slightly weaker EBITDA margin. TM’s reported PATAMI should continue to be boosted by the broadband tax incentive (1HFY12: RM188m) which partially offsets its tax expense.
VALUATION & RECOMMENDATION
Maintain BUY but FV revised to RM6.20. We cut our FY12/13 forecasts for TM by 2%-12% as we factor in higher opex assumptions from the expiration of warranties on Unifi equipment and building in higher content cost. Although TM has decided to give BPL a miss, we expect it to procure more compelling content over the next few quarters to improve its IPTV franchise and to compete with Maxis, which is set to roll out its IPTV service bundled with Astro’s content in 1Q2013. Our revised forecast models in EBITDA margin of 33.7% for FY12 and 34.2% for FY13.
We lower our FV on the stock to RM6.20 from RM7.00 previously on incorporating the revised estimates and pegging a slight lower FY13 EV/EBITDA multiple of 6.5x vs 7x. TM remains a BUY as there is still more than 10% upside to our revised FV, after the recent sell-down.
3Q12 results preview. TM will announce its 9MFY12 results on 30 Nov to be followed by an investors’ conference call. We expect its revenue to grow 2%-4% q-o-q (+6%-9% y-o-y), driven by its internet and data segments, while voiced revenue should stay relatively subdued. Although likely to see a deceleration, TM’s YTD revenue growth should still tracked ahead of its low-balled 2012 revenue growth KPI of 5% (1HFY12 revenue growth of 9.8%). We expect the group to report flattish EBITDA on higher content and maintenance costs, which allude to slightly weaker EBITDA margin. TM’s reported PATAMI should continue to be boosted by the broadband tax incentive (1HFY12: RM188m) which partially offsets its tax expense.
VALUATION & RECOMMENDATION
Maintain BUY but FV revised to RM6.20. We cut our FY12/13 forecasts for TM by 2%-12% as we factor in higher opex assumptions from the expiration of warranties on Unifi equipment and building in higher content cost. Although TM has decided to give BPL a miss, we expect it to procure more compelling content over the next few quarters to improve its IPTV franchise and to compete with Maxis, which is set to roll out its IPTV service bundled with Astro’s content in 1Q2013. Our revised forecast models in EBITDA margin of 33.7% for FY12 and 34.2% for FY13.
We lower our FV on the stock to RM6.20 from RM7.00 previously on incorporating the revised estimates and pegging a slight lower FY13 EV/EBITDA multiple of 6.5x vs 7x. TM remains a BUY as there is still more than 10% upside to our revised FV, after the recent sell-down.
Source: OSK
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