We upgrade TM to BUY (from HOLD) with a higher DCF-based TP of RM4.00 (from RM3.50). We are positive on TM’s new broadband plans – its Unifi packages exceed consumer expectations, without jeopardizing TM’s earnings. While we still see price risks for the Streamyx segment, its impact to earnings look manageable. All in, we raise our 2018-20E EPS by 3-21%, incorporating a lower decline in ARPUs, higher subscriber growth and lower depreciation expenses. TM’s share price is down 38% qoq on concerns over the price cut. At 20x 2019E PER / 5.4% yield, its valuation looks attractive.

TM Unveils New Broadband Plans: Something for Everyone

TM has unveiled its new broadband and mobile plans (Fig 1), offering (i) free speed upgrade for Unifi users (up to 10x); (ii) new Unifi basic broadband

plan (RM79/month) for households with monthly income below RM4,500; (iii) for Streamyx users – free upgrade to Unifi for users located in areas with coverage, or doubling of speed for selected users who are not in Unifi areas; (iv) relaunch of Unifi mobile postpaid at RM99/month; and (v) special deals for Unifi Advance Plan (30Mbps) and Unifi Advance Pro (50Mbps).

Unifi Users Rejoice, Streamyx Users May Not be as Enthusiastic

Broadly, we expect the Unifi users (51% of TM’s broadband subscribers) to be delighted with the new plans. The upgrades in broadband speeds (up to 10x) are ahead of consumer expectations of 2x speed upgrade and the new Unifi basic plan is priced at RM79, below TM’s earlier indication of “not more than RM100”. Unexpectedly, special deals are offered for Unifi Advance Plan and Unifi Advance Pro, with 13-22% discount in monthly fee. However, the Streamyx users (49% of broadband subscribers) may not be as enthusiastic. Approximately 30% of existing Streamyx users in Unifi area will get a free upgrade (to Unifi) while another 31% of Streamyx users will see doubling of speeds, subject to technical availability.

The New Plans Are Largely in Line With Government’s Aspiration…

We believe TM’s new broadband plans are in line with the government’s broadband aspiration: it offers both lower absolute package prices (for Unifi users) and substantial reduction in the price per Mbps (Fig 2). That said, the lukewarm receptions from Streamyx users may lead to further price promotions (for Streamyx) and / or higher capex spending to speed up the expansion of its Unifi coverage. All in, we believe the broadband price risk for TM has diminished, but not eradicated.

… But the Streamyx Users May Ask for More

Overall, we are positive on TM’s latest Unifi price plans – the substantial speed upgrades and modest price reduction should please Unifi users. While the down trading and low ARPUs for the Unifi Basic should reduce Unifi’s blended ARPUs (RM194 in 1Q18), a likely increase in subscriber base (migration from Streamyx, new subscribers for Unifi Basic) should partly mitigate the decline in ARPUs. On the contrary, we remain cautious on the Streamyx segment. We expect the Streamyx users to lobby for price reduction and / or access to Unifi, which may lead to further promotions in late-2018 / early-2019.

We Raise Our 2018-20E EPS Forecasts by 3-21%

All in, TM’s earnings prospects now look firmer (compared to our earlier expectations of a blanket 25% reduction in broadband ARPUs). We raise our 2018-20E EPS forecasts by 3-21% after imputing: (i) a lower decline in Unifi ARPUs of 20% (from -25%); (ii) higher Unifi subscriber growth; and (iii) lower depreciation charges, in tandem with management’s decision to lower its capex from c.30% of revenue to 20-22%. We make no changes to our assumptions for Streamyx ARPUs (-25% yoy). Our revised 2018E EBIT forecasts of RM924m is a tad below management guidance of RM1bn while our 2019-20E net profit forecasts are in line with the street’s estimates.

Upgrade to BUY With a Higher TP of RM4.00

We upgrade TM to BUY (from HOLD) with a higher DCF-derived 12-month target price of RM4.00 (from RM3.50) after incorporating our earnings upgrade and lower WACC of 7.4% (from 7.8%). TM’s latest broadband price plans and its recent KPI updates provide the much needed clarity in the changing broadband market. These positive updates should ease investor jitters and improve valuations. TM’s share price has fallen by 38% qoq due to concerns over a broadband price cut. At 20x 2019E PER / 5.4% 2019E dividend yield, valuations look attractive. Key downside risks to our call would be further reductions in broadband prices.

Fig 1: The new Unifi plans (basic and Turbo upgrade) offer significant increase in bandwidth speed and selective price reductions; separately, TM offers special upgrade for 340,000+ Streamyx customers in Unifi areas and plan to double the speed for another 350,000+ Streamyx customers who are not in Unifi area

Source: Affin Hwang Research - 13 Jul 2018