Telekom Malaysia Berhad (TM) has received from Malaysian Football League LLP (MFL) a writ of summons and statement of claim seeking reliefs in relation to a sponsorship deal which MFL claims TM to have breached. TM via its solicitors is taking the necessary action to defend its position. Among others, notable reliefs sought include orders for TM to pay RM428.5mn (excluding interest) mainly relating to sponsorship and broadcast consideration for the year 2018 to 2025 which we estimate could raise FY19F’s gross debt/EBITDA ratio from 2.4x to 2.5x and reduce our TP of RM2.15/share by circa RM0.10/share or 5%. We maintain our earnings forecasts until further developments. Reiterate Sell.
Malaysian Football League Seeking Reliefs
Telekom Malaysia Berhad (TM) has received from Malaysian Football League LLP (MFL) a writ of summons and statement of claim dated 18 March 2019, seeking reliefs (see Appendix 1) in relation to a sponsorship deal which MFL claims TM to have breached. TM via its solicitors is taking the necessary action to defend its position.
Among others, notable reliefs sought include orders for TM to pay RM428.5mn (excluding interest) mainly relating to sponsorship and broadcast consideration for the year 2018 to 2025. Note however that the amount could be offset against any other amount of sponsorship and broadcast consideration that MFL secures in place of TM’s for the year 2020 to 2025.
COMPANY UPDATE
To recap, TM and MFL had in January 2018 inked an 8-year sponsorship deal worth RM480mn that would see TM’s unifi brand as the title sponsor for the Super League and Malaysia Cup as well as co-sponsor for the FA Cup lasting until 2025. Last week however, MFL announced that the sponsorship deal was off as TM failed to fulfil its RM60mn annual sponsorship obligations.
In response, TM clarified that the group was indeed no longer a sponsor from 2019 onwards but the breakdown of the sponsorship deal was due to both parties being unable to mutually agree on several fundamental commercial terms as opposed to MFL’s claim that the group failed to meet its annual sponsorship obligations. In fact, TM had earlier on 1 November 2018 notified MFL in writing of the end of the sponsorship deal.
Our View
The latest development is a negative for TM as it presents downside risk to the group’s financials. At this juncture, the financial impact cannot be ascertained pending legal proceedings which may or may not be ruled in TM’s favour. However, in a worst-case scenario whereby TM pays the aforementioned RM428.5mn in one lump sum, we estimate: 1) FY19F’s gross debt/EBITDA ratio to rise from 2.4x to 2.5x which is also the group’s internal gearing threshold, and 2) reduce our TP of RM2.15/share by circa RM0.10/share or 5%. Meanwhile, from an operational standpoint, with TM no longer a sponsor, we believe it could to an extent hurt the converged experience for some customers as the continuity of the live football telecast as a part of unifi TV’s value proposition becomes a concern.
Impact
We maintain our earnings forecasts until further developments.
Valuation
Our TP for TM is maintained at RM2.15/share based on DCF valuation with a WACC of 14.1% and long-term growth rate of 1.0%. Reiterate Sell. Key risks include regulatory uncertainties and heightening competition.
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