Telekom Malaysia Bhd
(March 12, RM3.25)
Downgrade to neutral with an unchanged target price (TP) of RM3.60: Telekom Malaysia Bhd (TM) saw a challenging 2018 with headline net profit falling over 80% — core earnings were down 27% — following the Mandatory Standard Access Pricing (MSAP) implementation resulting in a lower revenue and margin, as well as higher impairments. For 2019, we see an easing of regulatory pressures, though the dust may not have settled as we had yet to witness the full impact of the cut in wholesale prices as customers could still switch to cheaper packages.

We expect a more significant impact on the retail segment with Unifi’s higher average revenue per user (Arpu) falling 15%, while there may still be further provisions in the wholesale segment, though the amount could be smaller than that in financial year 2018 (FY18). Meanwhile, we think an accelerated depreciation or impairment on outdated fixed network assets may persist in FY19 forecast. Since our upgrade on Nov 27, 2018, TM’s share price has risen 38%. Given a less compelling upside to our discounted cash flow (DCF)-based TP of RM3.60, we cut our rating from “trading buy” to “neutral”.

In FY18, TM recognised a provision of RM169.2 million arising from an estimated impact of the MSAP. We believe there could still be a further provision but the amount may be smaller than what was recognised in FY18, which should have taken into account the key services governed under the MSAP. As TM is still finalising rates with access seekers, we think there could still be some space for a further provision on perhaps the unregulated services, though the amount could be lower. Meanwhile, the retail segment should also be affected by a more substantial decline in Arpu. We assumed a 15% decline in Unifi’s Arpu to RM163 in FY19F, compared with only a 4% drop in FY18. Overall, we estimate FY19F revenue to fall 7% mainly due to a lower data and Internet revenue.

In FY18, TM also recognised an impairment of RM982.5 million on its fixed and wireless network assets, mainly due to technology obsolescence. Based on our estimate, the book value of TM’s telecommunication networks as at Dec 31, 2018 could be about RM10 billion. We worked out that accumulated impairment on network assets provided thus far amounted to RM1.2 billion, recognised in FY16 to FY18. We’re not ruling out the possibility of a further impairment or an accelerated depreciation to be made in future, particularly for its outdated copper cable network where its fair value could have fallen below its recorded cost due to rapid technological changes.

TM’s core earnings will not be affected by the provision and impairment as these items are excluded when evaluating the business’ underlying performance. We are maintaining our core earnings forecasts. However, we believe there could be some downside risks in terms of headline profit due to a potential impairment on its obsolete fixed network assets, which could lead to a lower dividend per share as its 40% to 60% payout guidance is based on reported figures. — PublicInvest Research, March 12