ALLIANCEDBS Research said that the current Movement Control Order (MCO) in Malaysia has seen bandwidth usage surge by more than 20% and this would be positive for Telekom Malaysia Bhd’s (TM) wholesale division.
However, the telco would be adversely affected by a softer retail market as well as reduced business activities across enterprise customers and the government. TM currently trades at 16.9x FY20 PE (near -1SD below the 5-year mean), which the research firm believes is fair and reflects the shift in regulatory landscape after 2018, especially for fixed broadband services.
“A near-term catalyst for the stock is potential inclusion into the FBM KLCI in the upcoming review in May, which should help to support TM’s share price further,” said AllianceDBS.
Compared to consensus, the research firm is more optimistic about TM’s FY21-22 earnings, in anticipation of margin improvements with cost-saving initiatives coming through. It opines that the RM21.6 bil NFCP (National Fiberisation and Connectivity Plan) will be a key medium-term catalyst for TM, with substantial RM10-11 bil funding from the government over five years. This could help accelerate TM’s high-speed broadband (HSBB) network rollout, especially to suburban and rural areas.
AllianceDBS expects UniFi net adds to be slower in 1Q20, especially after TM’s #PayNothing campaign ended in 4Q19 (free subscription until Dec 2019 if subscribers signed up or re-contracted for 24 months).
The Movement Control Order (MCO) also resulted in the postponement of installation at customer premises since mid-March. A slight positive was that these restrictions have been relaxed recently (new installations are now allowed in green zones with no confirmed Covid-19 cases), though it thinks this is unlikely to help much until the MCO is fully lifted.
To mitigate the current situation, TM is offering temporary free wireless internet services (UniFi Air) for customers who are waiting for fixed broadband installation at their premises.
AllianceDBS has kept its UniFi assumptions for now and believe they are rather conservative, having assumed a lower 80k net adds in FY20 (FY19: 146k) along with a 10% decline in ARPU to RM150 (from RM167 in FY19).
The near-term outlook for TM One is soft given reduced business activities across its enterprise customers and the government due to the MCO. According to management, some customers were allowed to defer their payment on a case-by-case basis, while some have tried to seek discounts.
The bright spots for TM are in the wholesale segment, where bandwidth usage has surged by >20% after the MCO was implemented. This is coming from two fronts: 1) international bandwidth for submarine cable connectivity; and 2) domestic bandwidth for mobile operators to support their backhaul transmission.
TM was also seeing good demand visibility for its data centre business, particularly the Iskandar Puteri Data Centre in Johor given the spillover effect from Singapore. To recap, TM is expecting revenue to decline by low to mid-single digits in 2020. This is mainly due to weaker internet revenue given the re-pricing in Streamyx services as well as intensifying competition for UniFi from new entrants. Management previously gave a broad guidance of achieving EBIT of over RM1.0 bil for 2020 (FY19: RM1.5 bil reported EBIT), but has tightened this down to RM1.0-1.4 bil in its recent update to investors.
Despite the structural decline in traditional voice services, TM still managed to achieve healthy revenue growth of 4-9% in FY12-17 due to the strong demand for internet and data services.
Since its rollout in 2010, TM’s fibre broadband service UniFi has enjoyed strong take-up rates due to pent-up demand for high-speed broadband connectivity. As at end-4Q19, TM had more than 1.4 million UniFi subscribers, representing about a 40% penetration rate out of 3.5 million premises passed.
AllianceDBS has maintained its hold recommendation on TM with a target price of RM3.80. — April 22, 2020
