TM’s earnings to take a hit as government looks to double speed, halve price of broadband

KUCHING: Telekom Malaysia Bhd’s (TM) future earnings are likely to take a hit as the new government looks to double the speed while halving the price of broadband.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), management highlighted the newly minted authority has reiterated its intention to halve the price of broadband internet while doubling the speed (as pledged in Pakatan Harapan’s manifesto for GE14).

“While the details of the plan have yet to be ironed out, we understand that a new task force is going to be set up in the ministry to study and implement the policy in stages,” Kenanga Research said.

“While the headline impact is likely to be substantial, given the Internet segment accounted for circa 36 per cent of the group’s total revenue in the first quarter of 2018 (1Q18), the impact to the earnings could be hit progressively due to the progressive implementation.”

The research arm said despite TM reiterating the group’s FY18 key performance indicators (KPIs) at 3.5 to four per cent topline growth, flattish normalised earnings before interest and tax (EBIT) growth at circa RM1.1 billion and mid-to-high twenties for the capital expenditure (capex)/revenue ratio, the tepid 1Q18 performance is likely to keep KPIs in check.

Affin Hwang Investment Bank Bhd (AffinHwang Capital) pointed out that TM’s share price has declined by 31 per cent over the last three months on concerns about the government’s plan to double the speed and halve the price of broadband.

In its view, the concerns were valid but the outcome was still uncertain.

“It is premature at this juncture to speculate on the possible outcomes or action plan,” the research firm said. “A gradual price reduction across targeted user group may be a good start, we think.”

All else equal, every five per cent cut in broadband prices will lower Affin Hwang’s discounted cash flow (DCF) fair value by nine per cent.

“However, the actual impact would also be affected by other variables such as subscriber growth, capex plan and cost optimisation initiatives.”

“In the long run, we see several possibilities that may lessen the financial impact on TM, ie. tax rebates, reviewing its long-term capex plan, increase in broadband user base, technology improvement, or sharing of cost burden with associated ministries.”

TM’s profit after tax and noncontrolling interests (PATAMI) for 1Q18 had stood at RM157.1 million as compared to RM230.4 million in the previous year.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) observed that the challenging market environment has negatively impacted the group’s voice, data and other revenues.

MIDF Research noted that fortunately, the internet revenues continue to record good traction which is mainly attributable to higher mix of unifi customers and resilient unifi average revenue per user (ARPU).

“However, we are concerned on the group’s ability to manage its operating expenses efficiently,” the research arm said.