Two recent broadband projects worth RM3.4 billion secured by Telekom Malaysia Bhd (TM) are expected to positively boost the group’s earnings from 2018 onwards.
According to AllianceDBS Research, the broadband projects — with co-investment of RM1.1 billion from the government – would lead to an annual increase in capex of RM400 million in FY2016 to FY2017 (excluding the government’s portion).
“Funding is not an issue as TM’s gearing level is comfortable at 1.1x net debt-to-earnings before interest income tax, depreciation and amortization (EBITDA),” pointed out analyst Toh Woo Kim in a company update on TM. “Earnings for FY2016-FY2017 are expected to be trimmed by 2%-3% largely due to higher depreciation charges.”
The projects involved are the High-Speed Broadband Phase 2 (HSSB 2) to boost Unifi coverage valued at RM1.8 billion and the Sub Urban Broadband (SUBB) to improve Streamyx speed worth RM1.6 billion. The government’s involvement in the HSSB 2 is RM500 million while the SUBB is RM600 million.
“There should be positive earnings from FY2018 onwards following the acceleration of the Unifi network and uptick in Streamyx average revenue per unit (ARPU),” noted Toh.
All-in, AllianceDBS has optimistically maintained a BUY position for TM in view of the HSBB 2, SUBB and wireless services that would drive long-term growth for the group as it expands its high-speed broadband network coverage to more areas. Its trading projection with a revised discounted cash flow (DCF)-based RM7.80 implies 8.3x FY2016 enterprise value (EV)/EBITDA and 26x FY2016 forecast price-earnings (F PE)
AmResearch: The research house noted that TM has already incorporated contributions from HSBB2 and SUBB, assuming net monthly subscriber additions of 11,000 for FY2016F-FY2017F. “This translates to the peaking of TM’s net gearing from 74% in FY2015F to 78% in FY2016F and subsequently decline to 73% in FY17F,” noted AmResearch.
The research house pointed out that the stock’s FY2016F PE of 25x is above its two-year average of 23x with fair dividend yields of 2%-3%.
As a whole, AmResearch maintained a HOLD stance on TM with a DCF-derived fair value of RM7.20/share, implying an FY2016F EV/EBITDA of 7.5x which is TM’s three-year average and half of Singapore Telecommunications Ltd’s 14x.
As at 12.16pm, TM was traded down 3 sen to RM6.49 with 1,086,300 shares traded.