Access pricing review may raise concerns
- MCMC’s PI Paper proposes 41-52% lower access prices for HSBB Layer 3. However, final access prices may be higher, as was the case in 2017.
- If unifi ARPU and HSBB wholesale revenue are hit by 5%/10%, we estimate TM’s FY23-25F core EPS to be lower by 6-12%/12-23%.
- Reiterate Add on TM (top Malaysian telco pick); TP unchanged at RM7.30.
Major cut proposed for HSBB regulated access price
The Malaysian Communication and Multimedia Commission (MCMC) published its Public Inquiry (PI) Paper on the Review of Access Pricing on 5 Oct, setting out its preliminary views and inviting feedback from interested parties by 21 Nov. It will publish its final views by 21 Dec, with the Commission Determination possibly in effect from 1 Jan 2023. A major concern is the 2023-25 proposed regulated access prices for Telekom Malaysia’s (TM) Layer 3 High-Speed Broadband (HSBB) network, which is 41-52% lower (service gateway) vs. current levels.
Negative surprise if implemented; final access prices may be higher
If implemented, it would be a negative surprise for TM as MCMC had seemed happy with the current retail fibre broadband prices and recognised the need to motivate infrastructure rollout. However, it is possible for the final access price to be higher than proposed. In the 2017 Review of Access Pricing, the final price was c.159-283% higher vs. the proposed rates. Also, MCMC is starting off this review with a set of proposed prices that are higher than that in 2017. TM believes there are cost justifications (and will put forth these in its submission) to support its view that the regulated HSBB access prices should not be cut.
Potential impact on TM’s core EPS and fair value
Based on the proposed rates, we estimate the wholesale cost for a new 100Mbps plan at RM69-76/month (10:1 contention ratio, non-recurring installation charges spread over two contract cycles). Assuming a further 20% cost on top and a 10% profit margin, retail service providers could price a 100Mbps plan at RM90-99/month, 23-30% cheaper vs. TM’s current RM129/month. In this case, we see TM giving free speed upgrades (like in 2018), rather than cutting prices. Given the hassle to switch/downtrade, smaller savings this time (vs. 2018) and rising demand for higher speeds, the bulk of subs may keep their price plans, thus reducing the unifi ARPU hit, in our view. If the impact is -5%/-10% to unifi ARPU and HSBB wholesale revenue, TM’s FY23-25F core EPS would be 6-12%/12-23% lower, while our DCF-based TP would fall by 12%/25% (see our scenario analysis in Fig 3).
Regulatory & political uncertainties may restrain near-term re-rating
We keep our Add rating, earnings forecasts and DCF-based TP (WACC: 7.8%) for TM, pending MCMC’s final determination. However, uncertainties from this and a potential general election by year-end may suppress the share price in the near term. For now, TM remains our top Malaysian telco pick due to its healthy 17.4% FY21-24F core EPS CAGR (key re-rating catalyst). Its FY23F EV/OpFCF of 7.8x is 31% below the mobile average, with decent 3.1-4.9% FY22-24F yields. Downside risk: adverse regulatory developments.