FixedCo Upside:

·          Dividend:  TM has committed to an annual dividend distribution of a minimum RM700m or up to 90% of profit, whichever is higher.  RM700m equates to 0.196 per share and a 5.5% yield, however based on consensus estimates of nearly RM900m of profit a potential dividend per share of 0.252 could be paid implying a yield of 7.0%.  As FixedCo will be viewed as a stable, dividend play comparisons to Malaysia’s other high-yielding companies will highlight the favorable valuation discrepancy that currently exists.  On peer yield valuations FixedCo would be worth 4.42 or 25% higher than current.

·          Repayment of 4.0bn loan:  RegionCo’s official repayment of the 4.0bn loan will leave FixedCo with no debt in 2009 giving management the opportunity to potentially relever and return cash to shareholders.  Based on 2009 EBITDA, one turn of leverage would equate to nearly 1.00 per share or nearly 30% of the current market capitalization.

·          Monetization of non-core assets: Management is currently evaluating the potential disposals of certain non-core assets such as the sale & leaseback of Multimedia University and the securitization of staff loans, as well as the potential IPO of Fiberail or the Yellow Pages business.  This is estimated to generate MYR0.5-1.0bn in net cash or 0.14 – 0.28 per share.  Management has shown its willingness to return cash to shareholders as recently as last quarter via the sale and leaseback of its corporate offices leading to a 0.65 special dividend for shareholders.

·          Capex: FixedCo’s commitment to fund the Malaysian government’s MYR15bn high-speed broadband initiative is a clear overhang, but potentially could offer upside should the government alter its investment plans or timing.  The government has committed to fund 1/3 of the cost with the goal of connecting 2.2m households with fibre to the home offering 10-50mps speed with the expected rollout to begin in 2009.  However, this might be delayed or even reduced as the recent changes in the government, specifically the communications ministry, has stalled the final agreement.   Every MYR1.0bn of capex adjustment affects the DCF value by approximately 0.25 per share.

FixedCo Risks:

·          Government influence: The key risk to Telekom Malaysia is the perceived notion of governmental influence on FixedCo’s operations, as the nation’s telecom provider.  As a 35% owner via their national investment arm Khazanah, the Malaysia government has some control on strategic direction, particularly as it relates to national welfare. This is most evident by RegionCo’s agreement to fund the government’s high speed broadband project.  While the government’s influence has historically been benign, it remains a concern amongst investors.

·          HSBB (High-speed broadband) Capex:  Given the limited information on the return potential or timing to-date, the HSBB projects continues to be cloud with regards to FixedCo’s cash flow visibility.  Given the sheer size of the capital commitment necessary any detrimental changes to the capex requirements could negative affect FixedCo’s share price.

·          Further slowdown in Voice revenues:  Voice revenues have continued to decline as mobile substitution grows.  Fortunately, mid-single digit year-over-year voice declines have been mitigated by growth in broadband, however further declines poses a risk to the stability FixedCo’s revenues and dividend payment.