We are neutral on TM’s re-pricing of Unifi plans as it is within our expectations. Despite the price cuts (7%-24%), we believe ARPUs will be largely resilient as higher entry level ARPUs would offset erosion from cheaper business ARPUs and some down-trading of plans. On the other hand, we are positive that uncertainty surrounding Unifi’s repricing has finally dissipated. We maintain our forecasts, TP of RM6.57 and OUTPERFORM call.

Revised pricing and free speed upgrades. We came away from TM’s briefing last Friday feeling largely neutral on Unifi’s re-pricing exercise. The company unveiled the following for its Unifi fiber broadband plans: (i) new pricing as per Exhibit 1, (ii) speed upgrades for existing subscribers to the next higher speed plan (whilst maintaining the same monthly fees), and (iii) discontinuation of the 30Mbps and 800Mbps plans.

For the free speed upgrades, customers on the 30Mbps package will automatically be upgraded to 100Mbps and so forth. The exceptions include the 30Mbps Pakej Perpaduan Rahmah and the 2Gbps plans. Additionally, customers that are not tied-up to existing contracts may downgrade their speeds without penalty. This exercise is targeted for completion within the next three months.

ARPU boost for entry level plans. For the home segment, the revised pricing translates to headline cuts of 7% to 24%. Nevertheless, we understand that the bulk (circa 80%) of TM’s subscribers is on the bottom two speed plans. Hence, moving forward, we anticipate that customers will retain their preference for entry level plans that are now priced slightly higher at RM99-RM139 for 100-300 Mbps (previously at: RM89- RM129 for 30-100 Mbps). As such, this implies ARPU boost of RM10 for new subscribers that come on board for entry level packages.

Not compelling to down trade. On a less encouraging note, TM does not discount the possibility that customers may down trade to lower speeds. We believe this applies to existing subscribers who were previously paying RM129 per month for the 100Mbps plan. Following this campaign, they are automatically upgraded to 300Mbps speeds. However, moving forward, as their contracts expire, a potential unfavourable outcome would be them opting to downgrade and revert to 100Mbps speeds. Hence, this would result in lower charges of RM99 per month that imply cost savings of 23% for these customers.

On the other hand, these same customers would have enjoyed the experience of 3x faster speeds prior to expiry of their contracts. Therefore, they may be reluctant to downgrade as it would result in a diminished internet experience. As such, the risk of down trading is low given that these customers could afford to pay RM129/month in the first place. Evidently, TM revealed that there was merely “low double-digit downtrade” within its subscriber base back in 2018. This was following its Unifi Turbo campaign which offered free 10x speed upgrades.

Milder price cuts for business plans. For Unifi Business Fiber subscribers, the price cuts are slightly milder at 7%-20%. Similar to the home segment, the large majority of business customers subscribed to the bottom two speed plans. Nevertheless, in spite of the lower prices, we believe there is limited impact to APRUs given that business subscribers merely comprise 11% of total Unifi customers.

Cost and capacity a non-issue. TM is fairly confident that its existing infrastructure has more than adequate capacity to accommodate increased internet traffic following the upgrades. Meanwhile, the group expects negligible hike in costs to cater for the higher bandwidth offerings. This is consistent with TM’s fiber business model where chunky infrastructure investments are incurred upfront. Hence, the company will only incur incremental costs to offer speed upgrades for customers.

Expect muted impact to ARPUs. Against the backdrop above, we are largely neutral on this re-pricing exercise which falls within our expectations. We believe that Unifi ARPUs will remain largely resilient as higher entry level ARPUs offset erosion emanating from cheaper business ARPUs and a small fraction of subscribers down trading. As such, we maintain our FY23F/FY24F average ARPU assumptions of RM130/RM118 (2QFY23: RM130, FY22A: RM134).

Taking the lead ahead of competitors. According to TM, the price revisions are in response to the “competitive” environment to defend its market share (estimate: 89%). To recap, TM is seeking agreement from access seekers on new wholesale prices under its new reference access offer (RAO). Upon acceptance of the RAO, we expect TM’s peers (e.g. MAXIS, CDB, UMobile) to reduce their broadband pricing to correspond to lower wholesale prices. Therefore, we commend TM for taking the early lead to revise prices ahead of its competitors. Hence, this would enable TM to outpace its peers in attracting and locking-in customers. Furthermore, we believe that Unifi’s subscribers will remain sticky in the near term given that 60%-70% of its entry level customers are currently tied to term contracts. Lastly, TM’s price revisions correspond with the government’s directive to reduce retail broadband prices.

Profit guidance remains intact. In spite of the Unifi re-pricing exercise, TM maintained its guidance of flat revenue and EBIT of RM1.8b-RM2.0b in FY23 (FY22: RM2.1b). The expectations above have factored-in price revisions for both its retail and wholesale businesses. Additionally, for the latter, TM has recognized some provisions earlier in 1HFY23. On an encouraging note, the group reiterated its guidance of higher dividends in FY23 to correspond with its official dividend policy (40%-60% PATAMI payout).

We maintain our forecasts, TP of RM6.57 (based on 5.5x FY24F EV/EBITDA) and OUTPERFORM recommendation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like TM on account of: (i) it being leveraged towards secular data growth on the back of current trends such as digital transformation, proliferation of internet of things (IoT), AI integration etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, and (iii) sustained traction in its cost optimization initiatives.

Risks to our call include: (i) higher-than-expected erosion in wholesale revenues from new RAO prices, (ii) pricing pressures at the retail segment arising from policy-led directives, and (iii) irrational competition in the retail fiber broadband space.

Source: Kenanga Research - 9 Oct 2023