Retain outperform recommendation with unchanged target price (TP) of RM8.21
|Telekom Malaysia's mobility brand, Webe going to wider audience on Sep 30|
Telekom Malaysia’s (TM) mobility brand, Webe, initially released only to selected TM customers, is finally opening up to the wider audience on 30 Sept. Expansion of the broadband business and improved network quality supported better average revenue per user (ARPU). At the same time, TM’s capital expenditure which peaks in 2016 may pave the way for better dividend payouts in 2017. On the back of strong growth and yield prospects, MQ research retains its outperform recommendation on the telecommunication company.
MQ Research reiterates their outperform recommendation on Telekom Malaysia following a non-deal roadshow with senior management in the US recently. It was very clear from the meetings that TM was concentrated on executing on its broadband business both in the wireline and wireless space. Increased coverage provided room for subscriber increases while improved network quality and content supported average revenue per user (ARPU) increase. In the wireless space, TM’s webe is about to be opened up to a wider audience on 30 Sept, paving the way for the next element of growth. With capex peaking, and no significant draw on cash ahead,
MQ Research maintains their view that TM’s dividends are also set to rise from FY17 as FCF yields rise above 4% in FY17. With superior growth and yield prospects relative to more richly valued mobile operators (7.0x EV/EBITDA vs 12-14x), TM remains MQ Research’s top telecoms pick in Malaysia.
Webe execution focused. While management refrained on issuing operating stats on webe, they were encouraged by the early experiences and it is now confirmed that webe will be made available to a wider audience from 30 Sept. The “controlled launch” has helped TM work through typical teething issues and also evaluate its network rollout ie giving it the opportunity to roam on Celcom’s 3G network in lower traffic areas. Webe is seen as a value added service to TM’s fixed broadband base as well as a means to expand its offerings to Enterprise customers rather than a standalone product. A prepaid offering will be made available in 2017.
Fixed broadband – expand and upsell. Demand for TM’s Unifi (fibre) service remains robust and the expansion under the Sub-Urban Broadband Project (SUBB) and High Speed Broadband Project Phase 2 (HSBB2) projects is helping drive take up. Meanwhile, take up of its IPTV service, HyppTV, which together with higher speed offerings has supported Unifi’s healthy ARPU trend. TM has rejigged its content offerings and recently decided to drop the English Premier League content which MQ Research believes would have cost c.RM80m pa, as it was not generating the expected returns.
Capex peaking, more returns ahead? Management confirmed that TM’s capex will peak in 2016 (MQ est RM3.5bn) and ease towards a long term capex to sales ratio in the mid to high teens – consistent with MQ Research’s estimates. While TM’s dividend policy remains unchanged ie RM700m or 90% of profits whichever is higher, management felt that there was no need to hoard cash.
12-month price target: RM8.21 based on a DCF methodology.
Catalyst: Continued delivery of operational and financial results
Action and recommendation
Source: Macquarie Research - 27 Sep 2016