Telekom Malaysia - Ringing loud

Telekom Malaysia (“TM”) remains our top pick in the Telecommunication sector. We reiterate our view that TM is well capable to declare another capital management plan at endFebruary 2013 (in conjunction with its 4Q12 result release) given its current financial muscle and declining capex trend. On top of this, an optimal capital structure remains the wild card to fuel its capital management as TM could potentially raise up to 46.4 sen via debts should the company aim to achieve its maximum optimal capital structure level. TM meanwhile is likely to be the biggest beneficiary of the proposed access pricing review, where the wholesale HSBB rates, Fixed Access services and Bitstream services will not be regulated in contrast to earlier suggestions in the plan. We understand that the mandated rates will be finalised in 1Q13. LTE will not post an immediate threat to TM’s FTTH due as its eco-system is still not well prepared yet although it could still potentially cannibalise FTTH’s business over the mid-to-long run due to its mobility features. We are maintaining our OUTPERFORM rating on TM with an unchanged target price of RM6.50 based on a targeted FY13 EV/forward EBITDA of 7.9x (+2.0 SD).

Potentially another capital management on the cards? We reiterate our view that TM will declare another 30.0 sen dividend in end-February 2013 under its capital management plan in conjunction with its 4Q12 results release then on top of its estimated 10.6 sen regular semi-annual dividend. The group has RM3.8b (or RM1.07/share)  in  retained  profits,  RM2.5b  (or RM0.70/share) in share capital and a cash and cash equivalent balance of RM3.1b as of 9MFY12. On top of that, we believe the group’s balance sheet is still underleveraged as its 9M12 gross debt/EBITDA ratio only stood at 2.1x - the lower end of its optimal capital structure of 2.0x-2.5x. Should TM optimise its capital structure to the maximum level, we estimate that the company could potentially raise up to RM1.66b (or 46.4 sen/share) in cash via debts, which will allow the group to spend on capex or distribute back to shareholders via capital management. TM has continued to reiterate its commitment to return excess cash to  shareholders should there be no additional capex required by the company. As a result, with its comfortable financial muscle coupled with a declining capex trend (which we forecast at RM2.6b, RM2.3b, and RM1.8b for FY12, FY13 and FY14 respectively), we believe TM is well capable to further reward shareholders. 

Benefits from access pricing review.  MCMC has lately concluded the public enquiry of its proposed access pricing review, where the mandated rates are set to be finalised in 1Q13. TM is likely to benefit the most from the review as MCMC is re-introducing various tier interconnection rates for CY13-CY15, which will see the origination rates being generally higher than the termination rate, thus benefiting the net senders of the interconnection charges like TM. Meanwhile, the wholesale HSBB rates, Fixed Access services and Bitstream services will not be regulated as the authority said that it would not promote competition at the current stage.

FTTH vs. LTE. While we believe that LTE/4G services will not post an immediate threat to TM’s FTTH, at least in the next 1-2 years, since the former’s eco-system is still not well prepared yet, LTE could still potentially cannibalise FTTH’s business over the mid-to-long run in our view. Nevertheless, it’s still too early to draw a conclusion of its effect to TM’s UniFi products given that celcos would need to rely on their own backhaul and other network backhaul providers to offload their data and thus this will limit its pricing & elasticity as compared to TM’s FTTH.  

Source: Kenanga