TM share price down 11% after broadband price cut announcement

• TM shares down 40 sen to RM3.23 at 12.14pm on June 21
• Axiata fell 2.75% to RM4.25, Digi.Com down 1.64% to RM4.29, Maxis dips 1.08% to RM5.51

TELEKOM Malaysia Bhd (TM)’s shares were down 11.02% or 40 sen to RM3.23 at 12.14pm on June 21, following Minister of Communications and Multimedia Gobind Singh Deo’s announcement on June 20 that broadband prices would be reduced by year end.

Other telco stocks also fell prior to the mid-day market close, however TM was impacted the most. At 12.30 pm, TM was down 10.74% to RM3.24, Axiata Group Bhd had fallen by 2.75% to RM4.25, Digi.Com Bhd 1.64% to RM4.29 and Maxis Bhd down 1.08% or 6 sen to RM5.51.

To recap, yesterday Gobind said that fixed broadband prices are expected to drop by at least 25% by year-end as part of the new government’s pledge to the people. This results from the enforcement of the Mandatory Standard on Access Pricing (MSAP), which sets the wholesale prices that can be charged by service providers such as TM.

According to AmInvestment Bank analyst Alex Goh, a 25% reduction in unifi revenue alone for TM could potentially wipe out almost 90% of the telco’s 2019 financial year forecast earnings. “Including a similar reduction in Streamyx revenue, it will translate to a slight loss for TM,” he said in a research note today.

Goh said that based on unifi’s 1.2 million customers and ARPU [average revenue per user] of RM194/month in 1Q18, they estimate that this division’s annualised revenue could reach RM2.7 billion, excluding Streamyx customers which could account for another RM1.2 billion.

He expects TM to continue appealing to the government to reconsider its decision. This is because a drastic cut will derail the group’s capex rollout programme under the High-Speed Broadband 2 drive to connect suburban and rural areas.

“This will also hinder plans to provide internet access throughout Malaysia, which Gobind indicated may be recognised as a basic human right by the government,” Goh opined.

“We continue to expect the national agenda to reduce broadband prices under the ‘double the speed for half the price’ campaign together with TM’s convergence strategy to offer quad-play services to eventually lead the path towards sector consolidation as the need for a potential re-merger with Axiata Group is re-accentuated by its weak 1Q18 results,” he added.

MIDF Research meanwhile, downgraded TM to a ‘sell’ with a reduced target price of RM3.02 in a report today, foreseeing a ‘bleak outlook’ for the telco.

“We are negative on the news. This means that we can expect broadband ARPU to reduce toward the end of 2018. This will negatively impact the group’s revenue. While TM may expedite its cost savings initiative, we doubt the group may reduce its operating costs to make up for the reduction in broadband prices,” MIDF said in its report.

The research house also expects further reduction in broadband prices, going forward. “To recall, based on Pakatan Harapan’s manifesto, it envisaged to halve the broadband cost and at the same time increase its speed. Thus, we do not discount the possibility that there could be further reduction in broadband prices.”

Commenting on the financial impact to TM, the research house said it is cutting TM’s FY18 and FY19 earnings estimates downward by -1.7% and -10.4% respectively, as it has reduced its broadband ARPU assumptions to reflect the government initiative of making internet services more accessible to the masses.

Affin Hwang Capital however, had a more tempered view of the impact on TM. It pointed out that TM’s management has yet to outline its strategy to mitigate the impact of falling broadband prices. “In the immediate term, the impact of revenue decline will be significant, in view of TM’s high fixed (manpower, depreciation & amortisation) and financial costs.”

“In the long run, we expect management to undertake various initiatives to tackle the changing business environment (i.e. streamlining of business operations, rightsizing of staff force and fine-tuning of capex allocation), and this should help mitigate the earnings /cashflow decline,” it concluded.

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