Telekom Malaysia Bhd
(Oct 3, RM3.48)
Maintain reduce with an unchanged target price of RM3.70: Telekom Malaysia Bhd (TM) launched its “Pay Nothing” promotion on Tuesday, whereby new and existing unifi broadband subscribers who sign up will enjoy monthly fee waivers upon activation until Dec 31 (up to three months). This is applicable across TM’s unifi 30-300Mbps (RM89 to RM199 per month), Home Fibre plans (except unifi Basic [RM79 per month for 30Mbps and a 60Gb quota], Lite [RM69 per month for 8Mbps] and Air [RM79 per month for 20Mbps]), as well as all of its business plans. The latter also saw eight to 10 times speed upgrades to 100/300/800Mbps, with the price of the base plan (100Mbps) cut by 22% to RM139 per month.

While TM has run promotions towards year end in the past to drive subscriber acquisition, we think its current offer is quite aggressive as the up-to-three-month fee waiver (equivalent to a 12.5% discount over a two-year contract) is more than the one month normally given to new subscribers, and the promotion is applicable to existing subscribers under contracts if they sign on and renew their two-year contracts. This may suggest that TM is trying to revive unifi subscriber growth (after a soft first half of 2019) and lock in existing subscribers, in the face of more intense competition. Our checks with TM’s customer service reveal that existing subscribers can downgrade to other unifi plans and still enjoy this promotion. Hence, we believe this offer is not intended to prevent downgrading.

TM’s new unifi business broadband plan revisions bring it in line with Maxis Bhd in terms of 100/800Mbps plans but the former’s 300/500Mbps plans are still 25%/11% more expensive. This comes about a year after the launch by Maxis. Although small and medium enterprises are less likely to downgrade versus retail customers, the speed upgrades, 100Mbps price cut and the up-to-three-month fee waiver promotion could still exert some downward pressure on the unifi business’ average revenue per user (Arpu) in the coming quarters.

We await the release of more data points in its upcoming third quarter of financial year 2019 (3QFY19) results. We currently assume overall unifi Arpu declines by about 21% from RM191 for FY18 to RM150 for FY23. Assuming Arpu drops by 15%/25% over the same period, our FY19 to FY21 core earnings per share forecasts would be raised or reduced by 1% to 7% and our discounted cash flow-based fair value would be 15% higher or 12% lower at RM4.25 and RM3.25 respectively. TM currently trades at a forecast FY20 (FY20F) enterprise value/operating free cash flow of 8.6 times, which is at a 40% discount to the Asean telecommunications average, and offers FY19F to FY21F dividend yields of 4.2% to 4.5%. Key upside/downside risks are unifi mobile turning profitable sooner than expected and keener broadband price competition. — CGS-CIMB Research, Oct 2