AMINVESTMENT Research has maintained its hold call on Telekom Malaysia Bhd (TM) with a higher discounted cash flow or DCF fair value of RM4.15 per share compared to its earlier target price of RM3.50 per share.
The new target price is based on a weighted average cost of capital or WACC of 7.4% and a terminal growth rate of 2% due to moderating pressure on fixed broadband rates.
The research firm said that based on its teleconference with the management of TM yesterday, it has raised slightly TM’s FY20-22 earnings by 2% on lower operating cost assumptions.
“Management had also indicated that the authorities have not been pressuring broadband operators to cut rates further for this year, in contrast to the National Fiberisation and Connectivity Plan which aimed to reduce entry-level packages to 1% of GNI (gross national income), implying RM40/month,” said AmInvest.
Datuk Noor Kamarul, who was appointed managing director/CEO in June last year, is realigning TM’s priorities by focusing on higher income yielding sites for broadband expansion and introducing more competitive products.
Operational costs are expected to continue to improve, following the 16% yoy drop to RM10 bil in FY19 due to the group’s Performance Improvement Programme. However, TM’s FY20F Ebit is expected to reach only RM1.4 bil vs. RM1.6 bil in FY19 due to higher capex rollouts in tandem with the group’s network improvement efforts.
“TM’s management had also indicated that the Movement Control Order (MCO) may slow down the projected FY20F capex of RM2.8 bil – the guidance was low-to-mid 20% of capex/revenue is maintained as rollouts could be ramped up after the MCO.”
So far, TM has spent RM10 mil out of the RM400 mil earmarked for the Covid-19 economic stimulus package to improve network quality. While this accelerates TM’s rollout plans, its capex guidance may be revised in 2QFY20 due to the MCO prerogatives.
The research firm also said that while net additions of Unifi subscribers have fallen on reduced churn during the first two weeks of the MCO with the closure of TM One kiosks, average revenue per user (ARPU) may experience lower pressure with minimal discounts being offered during this period, except on a case-by-case basis for some SMEs which include bill payment deferrals.
Although no discounts are being offered to the retail segment, free content such as video-on-demand is being offered currently. However, Streamyx ARPU, which fell RM15/month to RM96/month in 4QFY19, is expected to drop further due to the full-year repricing impact from last year.
Additional repair costs are unlikely as provisions are already budgeted for the recent undersea cable faults in the Asia Pacific Cable Network 2 which connects Malaysia to Singapore, Hong Kong and the US.
Foreign shareholding has fallen from a 2019 high of 14.3% to 11.5% currently. Against the backdrop of higher capex needs and weak near-term earnings outlook, the stock currently trades at a fair FY20F EV/Ebitda of 5x with a decent dividend yield of 3%.
At 11.30am today, TM shares were traded at RM3.78, unchanged from yesterday’s close with 890,000 shares changing hands. – April 14, 2020
