Telekom Malaysia (TM) reported headline 3QFY20 net profit of RM329.5m, jumping by 26.1% YoY on lower operating and direct costs as well as forex gain on borrowings. Stripping out non-operational items, TM posted a flattish normalised 3QFY20 net profit of RM288.9m (+0.4% YoY). For 9MFY20, results beat our and consensus estimates, accounting for 87% of full-year forecast. The shortfall in our earnings forecast was mainly due to higher direct cost and higher effective tax rate. Consequently, we raise our FY20-22F forecast by 10-11% as we lower our cost assumption. Although the capex guidance for FY20F has been reduced from ~20% to 12-15% of revenue, we maintain our forecast of capex at 20% of revenue for FY21-22F as we expect spending to pick up in view of TM’s commitment in supporting the country’s aspiration in providing nationwide digital connectivity. Our TP for TM is revised up from RM4.00 to RM4.40. However, given a 9% potential downside and the recent run-up in share price (which probably priced ahead this positive set of results), we cut our rating on TM from Neutral to Trading Sell. No dividend was declared for the current quarter.

• 3QFY20 revenue was down 5.7% YoY due to lower contribution from all business segments i.e. voice (-2.9% YoY), internet (-2.7% YoY) and others (-29.4% YoY). Data was the only division that delivered higher revenue (+7.5% YoY) due to stronger domestic wholesale data consumption. Meanwhile, ARPU for both unifi and Streamyx was lower at RM148 and RM92 in 3QFY20, posting an 11.4% and 17.1% decline, respectively. Customer base for unifi expanded by 20% to 1,648k while Streamyx’s base shrank 21.6% to 616k.

• 3QFY20 normalised net profit was flat YoY. Despite lower revenue, TM managed to chalk flattish earnings growth due to lower direct cost, manpower cost and operating expenses. Total cost to revenue declined from 86.5% in 3QFY19 to 84.8% in the current quarter. On QoQ basis, normalised profit improved by 8% due to a 3.8% increase in revenue though total cost was also higher (+4.3%). The increase in total cost was mainly due to higher manpower cost, which added 5.4%. Depreciation & amortisation was also higher, +7.1% QoQ.

• Outlook. TM and Malaysia Digital Economy Corporation (MDEC) have recently announced a collaboration to enhance digital readiness of the country. This encompasses digital empowering of micro, small and medium enterprises (MSMEs), encouraging rural digital economy, uplifting Malaysians with digital skills and tapping on each other’s strengths in digital advocacy. Essentially, the objective of the collaboration is to produce business and technology savvy entrepreneurs and MSMEs who will in return drive Malaysia’s economic growth in the future. Although we are not expecting any material financial impact on TM, this initiative is in line with the National Digital Infrastructure Plan (Jendela) that would benefit the economy in the long run.

Source: PublicInvest Research - 26 Nov 2020