We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-derived fair value

We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-derived fair value of RM7.20/share. This implies an FY16F EV/EBITDA of 7.5x, which is TM’s 1-year average and half of Singapore Telecommunications Ltd’s 14x. TM’s 72.9%-owned webe services, in its official launch yesterday, will only be available to the public in 4Q2016. While not yet available to non-TM customers, the current webe 4G LTE plan is priced at RM199/month (excluding GST) for the rest of the Malaysian public. Malaysians who are interested to sign up for the webe 4G LTE service may register their interest on the webe website. In our view, webe is likely to offer plans to the public with much lower pricing terms, similar to the offer to its existing subscriber base. Recall that on 30 June this year, webe unveiled its 4G LTE postpaid plan priced at RM79/month with unlimited Internet data, unlimited calls and SMS only to existing TM and P1 subscribers. For tethering via the webe mobile plan (using Wifi Hotspot/webe Internet on computer), an additional RM6 will be charged for 2 hours, excluding GST. Additional webe lines will also be  offered at discounted rates.

Given that webe offers unlimited data, the Wifi hotspot option is offered in case of issues with its data speed and quality as the network currently deploys TMGo’s 850MHz band while sharing of Celcom’s 2G and 3G infrastructure for areas beyond its coverage. At such low prices, it is unlikely for webe to breakeven in the next few years given that webe’s losses widened to RM124mil from RM103mil in 4QFY15 largely due to accelerated depreciation and impairment for WIMAX assets, which will be replaced by LTE equipment. As we expect TM to package its webe offering together with the group’s other services to provide a ‘converged’ solution to customers, the potential cross-subsidies between the group’s operations are likely to maintain pressure on the its margins.

Hence, webe’s losses are projected to continue but at a slower pace given that mobile operators such as Maxis and Celcom will have a head start in offering combination packages. Our channel checks indicate that celcos do not expect webe’s free data option at such low prices to be sustainable in the longer term, when its subscriber base has reached near its competitors’ scale. Hence, we maintain FY16F-FY18F earnings, pending the announcement of its results on 30 August. The stock’s FY17F PE of 24x is near its 1-year average of 25x.