Lower average revenue per user could pressure TM’s earnings

The telco is reducing the price of its Streamyx service plan and is looking to upgrade the speed of its Streamyx customers


TELEKOM Malaysia Bhd’s (TM) move to slash prices on its Streamyx service plans could hurt the group’s earnings in the near to mid term due to the negative impact upon its average revenue per user (ARPU), JPMorgan Asia Pacific Equity Research said.

Last weekend, TM said it was reducing the price of its 8Mbps Streamyx plan from RM160 a month to RM69 for existing customers, while new customers can get the plan at RM89.

The telco is also looking to upgrade the speed of its Streamyx customers and is exploring solutions which include fibre and wireless broadbands.

The telecommunication giant expects to upgrade 70% of its Streamyx customers to unifi fibre broadband services by end-2020.

Counter-intuitively, migration to fibre could lead to further compression of ARPU for TM despite faster speed and capital expenditure (capex) required to migrate customers.

TM’s Streamyx 8Mbps plan is priced at RM160, while unifi 30Mbps plan is priced at RM79.

JPMorgan noted for every RM10 reduction in Streamyx ARPU is 1% dilutive to TM’s revenues. At the end of the first quarter of 2019 (1Q19), there were 872,000 Streamyx customers generating an ARPU of RM87.

“If ARPU declines to RM77, we calculate revenues loss of about RM100 million which is about 1% of our forecasted financial year 2019 revenues of RM11 billion,” the investment bank stated in a note last Friday.

According to JP Morgan, unifi fibre ARPU declined by 7% year-on-year to RM179 in 1Q19 from RM193 in 1Q18, adding unifi fibre ARPU also likely to remain under pressure.

“There is further downside risk to TM’s unifi fibre ARPU as currently three out of its four plans are priced lower than its ARPU. There’ll be a significant downside to share price if cost reduction announced in 1Q19 is not sustained,” the bank said.

JPMorgan forecast TM’s revenues to decline in the near future due to the reduction in tariffs and risks of new entrants with the mandatory standard on access pricing.

In contrast, TM’s share price has rallied 57% year-to-date (KLCI: -2%) following the material reductions in costs resulting in earnings surprise in 1Q19.

“In our view, questions remain on the sustainability of the lower costs reported in 1Q19 and there is a likelihood that many of the costs are back-end loaded in the year,” the firm said.

JPMorgan foresees significant downside to the current share price — its price target of RM2.4 implies 42% downside to share price, if most of the cost reductions are not sustained.

“If our scepticism is unfounded and the cost reduction is indeed sustainable, we calculate 12% potential upside in TM’s share price,” the research house said.

JPMorgan noted that TM’s lower retail tariffs and downtrading is likely to pressure ARPU with fixed broadband customers facing risk from new entrants and substitution by wireless services.

“In our view, TM’s earnings are likely to decline over the midterm. We see downside risks to 2019 earnings before interest and taxes guidance without significant cost optimisation.

“Our 2020 earnings per share forecast is 18% below Wall Street. Our discounted cashflow (DCF)-based Dec-19 price target is RM2.40. Hence, we are ‘Underweight’ on TM,” the research firm said.

On valuation, JPMorgan said its December 2019 price target of RM2.40 is based on DCF valuation with a weighted average cost of capital of 7.5% and long-term growth rate of 1%.

The research house noted risks to rating and price target include fixed consolidation where TM is the target company; consolidation in the wireless industry, leading to price repair; better than expected execution of efficiency measures; higher than expected adoption of fixed broadband services and/or market share gains in the wireless segment; and lower than expected capex, which could support free cashflow and dividends and present upside risk to TM’s share price.