Macquarie Equities Research (MER) has reiterated their Outperform call on Telekom Malaysia (“TM”) with a revised price target of RM8.30, a 27% upside from Friday’s close of RM6.53 and here is why…

Event

• MER reiterates their Outperform recommendation and top pick in the Malaysian telecoms space, Telekom Malaysia (TM). MER cuts their price target to RM8.30 from RM8.72 following a review of MER’s estimates post 4Q15 results. TM’s expanding fixed broadband network is spearheading new growth opportunities even as macro headwinds cap consumer spending. Meanwhile, the mobile roaming agreement signed with Celcom in early February means TM is well on track for the launch of its wireless service in 2016. Both, MER believes will be key rerating catalysts for its shares, which at 7.2x 16E EV/EBITDA trade at a discount to mobile peers while offering a similar dividend yield (3%), while offering better growth characteristics..

 
Impact

• Wireless kicker in 2016. MER’s recent meetings with management lead MER to believe that TM is well on its way to a 2016 launch of its wireless service. The roaming agreement with Celcom allows TM to launch its nomadic/mobility solutions nationwide, despite having limited coverage on its own wireless assets to start. As pointed out before, management is looking at the mobility/nomadic product as a value-added service to existing broadband subs to begin with. MER also sees TM’s wireless network providing cost-efficient broadband solutions to the 3m households (40% of total) which don’t have broadband access and the 2.5m households (33%) on inferior wireless technologies.

• Expanding fixed network aiding growth. TM’s strongest quarter of net adds for Unifi (fibre service) since mid-2013 following the expanded network coverage as the HSBB2 project got underway, in MER’s view, demonstrates the strong latent demand for fibre services in Malaysia. The HSBB2 and SUBB (suburban broadband) projects, will allow up to 800k premises to gain access to wired high-speed broadband services.

• P1 drag on earnings to continue. MER does expect further accelerated depreciation (MQ est RM75m and RM50m) as P1’s network is upgraded to LTE, to cap EBIT and earnings growth in 2016 and 2017. However, MER believes that as the market factors in the growth potential of this wireless venture, these non-cash items are likely to be accepted as non-core.

 
Earnings and target price revision

• MER reduces their FY16-18 core profit estimates for TM by 2-18%, largely on the back of higher accelerated depreciation. MER’s EBITDA estimates are trimmed by 0.6-1.0% largely on the delayed launch of its wireless service. MER’s discounted cash flow derived price target for TM is reduced to RM8.30 from RM8.72.

 
Price catalyst

• 12-month price target: RM8.30 based on a DCF methodology.

• Catalyst: Launch of wireless service in mid-2016.

Action and recommendation

• Outperform reiterated.

Source: Macquarie Research - 14 Mar 2016