Telekom Malaysia’s (TM) 2QFY23 net profit surged to RM568.9m from RM378m in 2QFY22, mainly on the back of the recognition of tax credit from unutilised tax losses. Operating revenue was flat as the decline at TM One was mitigated by an increase in TM Global’s revenue, while Unifi’s revenue was stable. Operating profit fell 9.6% YoY due to higher total cost namely, depreciation, direct and other operational cost. At the operating profit level, cumulative 1HFY23 results were within our expectations but above consensus full-year estimates at 53% and 58% respectively. TM remains our top pick in the telco space, owing to its leading position as the country’s preferred network infrastructure provider. Maintain Outperform with an unchanged TP of RM6.20. A higher interim dividend of 9.5 sen per share was declared (2QFY22: 9 sen per share).

• 2QFY23 revenue was flat, as the increase in revenue contribution from TM Global was offset by lower revenue from TM One. TM Global recorded a 10% growth, mainly contributed by higher demand for both domestic and international data services. It coninued to cater to mega badnwindth requirements of a US-based hyperscaler connecting Malaysia to Singapore while deploying 4G/5G fibre rollout for high speed broadband access. However, TM One’s revenue declined by 11.4% YoY as a result of price reduction of large government contracts and lower one-off revenue from customer projects. Meanwhile, Unifi’s revenue was stable with subscriber base growing by 10.9% on a lower ARPU (-5.1% YoY).

• 2QFY23 net profit jumped 50.4% YoY, mainly due to the recognition of tax credits from unutilised tax losses. Operating profit was down 9.6% due to higher direct cost (+2.7% YoY), operational cost (+26.4% YoY) and depreciation cost (5% YoY). The increase in operational cost was attributable to higher maintenance, utilities and advertising costs.

• Outlook. Direction from the Malaysian Communications and Digital Minister Fahmi Fadzil that internet prices must be reduced by September should impact TM’s margin going forward, as wholesale prices that it imposes on other service prodviders would have to be cut as part of the Mandatory Standards on Access Pricing (MSAP) revision. Meanwhile, TM One’s earnings are expected to be weaker due to the reduction in prices of large contracts, particularly the MyGov*Net 2.0. Nevertheless, we expect offsetting effect from lower tax rates to continue beyond FY23F, following its internal reorganisation of TM Tech that would enable the utilisation of tax credits accrued.

Source: PublicInvest Research - 28 Aug 2023