Telekom Malaysia : To manage national emergency lines

· About MERS 999 Project
TM yesterday announced the acceptance of a Letter of Award (LoA) from the Government for the implementation of the Malaysian Emergency Response System 999 (MERS 999 Project) worth RM334.05m whereby TM will build and manage the project for 3 years effective from May 2007 until June 2010. We understand from management that work has already  been done on the project since last year, and they expect to formally sign an agreement soon.
The project is an Integrated Emergency Response System that will consolidate four emergency services with the capability to automate the filtering of crank and prank calls, thus improving efficiency and response time of emergency services in Malaysia.
· Earnings impact unclear; likely to be marginal
As the agreement has not been signed, management could not provide guidance on the profit margins of the project. More details will only be known once the agreement has been entered into, by which we will revise our earnings estimates from FY09 to FY10 upwards. Nonetheless, we expect minimal impact to earnings. Assuming an arbitrary but reasonable net profit margin of 10%, the proforma impact on EPS in FY09 and FY10 is marginal at only 2%-3%.
· Maintain HOLD, TP unchanged at RM2.74
We maintain our HOLD call and target price at based on DDM (Dividend Discount Model), as the earnings impact is small and does not affect our dividend assumptions which are the key drivers of our valuation. Our DDM valuation is premised upon a WACC of 7.6% and long-term growth rate of 0.5%. We have assumed that the company will pay RM700m p.a. in dividends until perpetuity, and thus believe our target price is a base case valuation given the potential upside of higher dividend payouts (90% of normalised PATMI) should TM’s operating performance exceed our expectations. Key risks to our target price are (1) less than RM700m p.a. dividend payout and (2) acceleration of fixed-to-mobile migration trend.