TELEKOM MALAYSIA BUY. Focused on convergence & digitisation. Company report. (Maintained) TELECOMMUNICATION

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1 TELECOMMUNICATION TELEKOM MALAYSIA (T MK EQUITY, TLMM.KL) 24 May 2017 Company report Alex Goh Focused on convergence & digitisation Rationale for report: Company update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM6.44 RM7.90 RM6.90/RM5.81 YE to Dec FY16 FY17F FY18F FY19F Revenue (RM mil) 12, , , ,310.8 Core net profit (RM mil) FD Core EPS (sen) FD Core EPS growth (%) Consensus Net Profit (RM mil) DPS (sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) Stock and Financial Data Shares Outstanding (million) 3,577.4 Market Cap (RMmil) 23,038.5 Book Value (RM/share) 2.05 P/BV (x) 3.1 ROE (%) 10.0 Net Gearing (%) 70.7 Major Shareholders Free Float 30.0 Avg Daily Value (RMmil) 31.5 Khazanah(26.2%) EPF(16.3%) Price performance 3mth 6mth 12mth Absolute (%) (3.6) Relative (%) 1.7 (5.4) (10.8) May-12 May-13 May-14 May-15 May-16 T MK FBMKLCI Index 2,000 1,800 1,600 1,400 1,200 1, Investment Highlights We maintain our BUY call on Telekom Malaysia (TM), forecasts and fair value of RM7.90/share based on an FY17F EV/EBITDA of 9x, which is at a 35% discount to Singapore Telecommunications Ltd s 14x as the possibility for a likely re-merger with Axiata Group reduces the valuation differential. While management appears to be unaware of any proposals of a re-merger, we do not discount that such plans may be in the review of Khazanah Nasional, which owns the major equity stakes in TM at 26% and Axiata at 37.6%. During the analyst briefing yesterday, we were introduced to the new managing director/group CEO Datuk Sri Shazalli Ramly, executive director/deputy group CEO Datuk Bazlan Osman and group CFO Nor Fadhilah Mohd Ali together with the rest of the new management heads. Shazalli, who re-joined TM from Axiata on 1 May this year, affirmed that his new role will be focused on rallying the group to be the country s convergence champion and digitising the group s core operational and service platforms. While this is aligned with the overall strategy outlined by his predecessor Tan Sri ZamZamZairani Mohd Isa, Shazalli s forte in media, marketing and branding will push further for a higher share of customers moments/experiences with the use of analytics/big data in promoting quad play services. Management reaffirmed its FY17F targets: 3.5%-4% revenue growth, flat EBITDA and capex/revenue ratio of 30%-35%. This also means that operating costs, which declined 11% QoQ in 1QFY17, are expected to have a flat trajectory, including additional costs from the progressive rollout of webe s LTE network, High Speed Broadband 2 and Sub-Urban Broadband. As voice revenues via copper cables continue to decline (-6% QoQ and -5% YoY in 1QFY17), the group s revenue growth prospects stems largely from data and internet services provided mostly via its UniFi fibre-optic broadband and submarine networks. Hence, recruitment rates for new UniFi customers remains robust, increasing by 30,000 from 28,000 in 4QFY16, with the base reaching 979,000. This appears to be partly from its Streamyx base, which has declined 2% QoQ to 1.4mil. Webe, leveraging UniFi s strength, still has a minimal subscriber base currently compared to the current celco incumbents. Expected to break even by next year, it will be targeting small and medium-scale enterprises, enterprise and public sectors. Based on a wholly digital platform, webe will shift away from traditional marketing outlets, with plans to introduce pre-paid services later this year. The stock currently trades at an attractive FY18F EV/EBITDA of 7x, half of SingTel s 14x. Its dividend yields are fair at 3.3%.

2 EXHIBIT 1: RESULTS SUMMARY FYE Dec (RMmil) 1QFY16 4QFY16 1QFY17 QoQ (%) YoY (%) Revenue 2, , ,964.6 (8.4) 3.8 Operating cost (1,973.8) (2,295.4) (2,053.0) (10.6) 4.0 Other operating income (8.2) Other gains/(losses) (4.7) (>100) (>100) EBITDA (2.8) (2.9) Depreciation (643.1) (685.0) (645.8) (5.7) 0.4 EBIT (9.5) Finance income (23.1) Finance cost (94.0) (96.7) (100.0) Forex gain/(loss) on borrowings (120.5) 22.7 Associates (10.0) 5.0 Pretax profit >100 (32.9) Tax (102.7) (5.6) (79.3) >100 (22.8) Minority interest (6.7) 44.2 Net profit (28.5) Normalised net profit (14.9) 13.2 EBITDA margin 34.1% 30.0% 31.9% EBIT margin 11.6% 8.9% 10.1% Pretax margin 13.8% 3.4% 8.9% Core net margin 7.1% 8.3% 7.8% Tax rate (ex-forex) 35.6% 2.4% 32.9% EPS (sen) (29.1) GDPS (sen) Book value (RM/share) (2.9) (1.1) Source: Bursa Malaysia x 8.5 EXHIBIT 2: EV/EBITDA Source: Bloomberg AmInvestment Bank Bhd 2

3 EXHIBIT 3: RESULTS BREAKDOWN FYE Dec (RMmil) 1QFY16 4QFY16 1QFY17 QoQ (%) YoY (%) Mass market 1, , ,307.1 (0.2) 8.2 Managed accounts 1, , ,067.5 (12.0) 2.9 Global & wholesale (20.3) 6.4 Shared services (6.2) (26.4) Total revenue 2, , ,964.6 (8.4) 3.8 Mass market (24.8) 17.7 >100 (88.2) Managed accounts (14.2) Global & wholesale (42.2) >100 Shared services (116.6) 0.1 (3.9) (>100) (96.7) Total operating profit (RMmil) (8.1) 6.1 Operating margin Mass market 12.4% (1.9% ) 1.4% Managed accounts 22.6% 14.7% 18.9% Global & wholesale 12.6% 38.2% 27.7% Shared services (64.4% ) 0.1% (2.9% ) Cost analysis (RMmil) RMmil 1Q16 4Q16 1Q17 QoQ (%) YoY (%) Direct cost (3.1) 4.9 Manpower (11.6) 5.1 Supplies/Materials (35.0) 10.9 Bad & doubtful debts (62.7) (85.4) Marketing expense (19.3) (2.7) Maintenance (9.1) 8.7 Other opex Depreciation (5.7) 0.4 Total Cost 2, , ,698.8 (9.4) 3.1 ARPU (RM/subs/month) Fixed line (DEL) (7.1) (7.1) Streamyx (2.2) 1.1 Unifi Source: Bursa Malaysia AmInvestment Bank Bhd 3

4 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Telekom Malaysia 24 May 2017 EXHIBIT 4: PB BAND CHART EXHIBIT 5: PE BAND CHART δ Avg -1δ δ Avg -1δ AmInvestment Bank Bhd 4

5 EXHIBIT 6: FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F Revenue 11, , , , ,310.8 EBITDA 3, , , , ,641.8 Depreciation/Amortisation (2,437.3) (2,634.6) (2,775.5) (2,932.7) (3,065.3) Operating income (EBIT) 1, , , , ,576.5 Other income & associates (159.7) (57.3) Net interest (159.0) (225.4) (203.0) (245.7) (283.0) Exceptional items Pretax profit , , ,327.5 Taxation (320.0) (305.1) (298.6) (318.9) (318.6) Minorities/pref dividends (60.2) (62.0) (63.9) Net profit Core net profit Balance Sheet (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F Fixed assets 15, , , , ,817.9 Intangible assets Other long-term assets 1, , , , ,617.5 Total non-current assets 17, , , , ,999.0 Cash & equivalent 3, , Stock Trade debtors 2, , , , ,631.4 Other current assets Total current assets 7, , , , ,217.3 Trade creditors 4, , , , ,376.2 Short-term borrowings Other current liabilities 1, , , , ,218.6 Total current liabilities 5, , , , ,405.9 Long-term borrowings 7, , , , ,535.0 Other long-term liabilities 3, , , , ,116.2 Total long-term liabilities 10, , , , ,651.2 Shareholders funds 7, , , , ,826.8 Minority interests BV/share (RM) Cash Flow (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F Pretax profit , , ,327.5 Depreciation/Amortisation 2, , , , ,065.3 Net change in working capital (36.1) (235.0) (14.2) (11.6) (11.8) Others (123.9) (756.4) (1,413.0) (413.5) (475.1) Cash flow from operations 3, , , , ,905.9 Capital expenditure (2,930.4) (3,316.7) (3,759.6) (3,229.4) (2,662.2) Net investments & sale of fixed assets Others (74.6) (100.2) (123.1) Cash flow from investing (2,817.8) (2,964.5) (3,834.1) (3,329.6) (2,785.2) Debt raised/(repaid) 1, (92.6) Equity raised/(repaid) Dividends paid (630.3) (808.0) (808.0) (808.0) (845.6) Others (375.2) (183.8) (446.1) (429.0) (413.6) Cash flow from financing (212.2) (1,346.6) (1,200.1) (1,220.5) Net cash flow (615.0) (2,638.2) (746.6) (99.8) Net cash/(debt) b/f 3, , , Net cash/(debt) c/f 3, , (51.3) Key Ratios (YE31 Dec) FY15 FY16 FY17F FY18F FY19F Revenue growth (%) EBITDA growth (%) Pretax margin (%) Net profit margin (%) Interest cover (x) Effective tax rate (%) Dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmInvestment Bank Bhd estimates AmInvestment Bank Bhd 5

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