Lower broadband prices will eat into TM's earnings: Analysts

PETALING JAYA: Analysts have slashed earnings forecasts for Telekom Malaysia Bhd (TM) by as much 20% after Multimedia and Communications Minister Gobind Singh Deo indicated that broadband prices will drop by at least 25% by year-end.
The news also sent TM's share price down by as much as 14% today to a day low of RM3.12. At market close, the stock was 49 sen or 13.5% down at RM3.14 on volume of 68.53 million shares.
PublicInvest Research expects TM to post a reduction of 8% to 30% in average revenue per user (ARPU) but its subscriber base could rise 15% annually as broadband becomes more affordable. It will also prompt TM to be more aggressive in implementing cost-cutting measures in order to grow its bottom line.
After taking into account lower ARPU, higher customer base and lower operating costs, PublicInvest Research has cut its FY18-20 earnings forecasts for TM by 6% to 20%. Its target price for the telco's share is reduced from RM5.60 to RM4.65 with a "trading buy" call.
Given subdued revenue growth, PublicInvest Research believes TM's management will be more aggressive in implementing cost rationalisation measures in order to deliver earnings growth beyond FY19.
"We reckon areas for cost efficiency improvement include direct and manpower cost, which accounts for 40% of total cost."
Due to the negativity surrounding TM and the industry, MIDF Research has downgraded its call recommendation to "sell" from "neutral" with a lower target price of RM3.02 from RM4.09.
"To be on the conservative side, we are cutting FY18 and FY19 earnings estimates downward by -1.7% and -10.4% respectively as we reduce our broadband ARPU assumptions to reflect the government initiative of making internet services more accessible to the masses."
The research house opined that any cost-saving initiative programme implemented by TM would be inadequate to match the reduction in broadband prices.
"In addition, due to the earnings pressure and the group's commitment capex commitment for long-term growth, we expect the dividend payment to remain unattractive as well."
AmInvestment Bank, meanwhile, said a 25% reduction in Unifi (TM's broadband service) revenue alone could potentially wipe out almost 90% of TM's FY19 earnings. "Including a similar reduction in Streamyx revenue, it will translate to a slight loss for TM."
Following that, the research house expects TM to continue appealing to the government to reconsider its decision as such 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."
AmInvestment Bank also noted that the national agenda to reduce broadband prices 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 Q1 18 results.