Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM4.15/share based on a WACC of 7.4% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 5x — at parity to its 2-year average.

• We maintain FY20F–FY22F earnings as TM’s 1QFY20 normalised net profit of RM241mil (excluding forex losses) came in line with our and street’s expectations.

• The group’s core net profit accounts for 28%–29% of our and street’s FY20F net profit, well within the 17%–30% range for 1Q over the past 3 years. The group did not declare any interim dividend as expected.

• TM’s 1QFY20 normalised earnings decreased by 19% YoY mainly from a 178K reduction in Streamyx subscribers to 694K and a 15% drop in Unifi average revenue per user (ARPU), even though this was partly offset by a 167K migration to Unifi users, rising by 3% to 1.5mil.

• Overall 1QFY20 operating costs are still declining due to the group’s Performance Improvement Programme (PIP), but at a slower pace of 4% YoY to RM1.7bil vs 17% YoY for 1QFY19.

• However, the operational cost savings could be offset by higher capex, which rose 74% YoY to RM262bil in 1QFY20. This could rise even further as 1QFY20 spending only accounted for 10.2% of revenue vs management’s earlier guidance of a low-to-mid 20s%, of which fiberisation is expected to account for 30%.

• In light of the Covid-19 pandemic, management is currently reviewing its 2020 guidance for a low-to-mid single-digit revenue decline due to the full-year impact of Streamyx repricing on the retail segment.

• QoQ, TM registered a 27% normalised net profit increase despite a 16% revenue drop. This stems largely from lumpy year-end spending in 4QFY19, partly contributed by a 6% decline in depreciation.

• Unifi reversed to an operating profit of RM84mil in 1QFY20 vs. a loss of RM21mil in 4QFY19 which registered lumpy year-end cost provisions. Likewise, TM One registered a 45% QoQ operating profit increase to RM284mil.

• Against the backdrop of TM upgrading Streamyx users by 2021, net broadband subscribers slid marginally by 1K QoQ as new Unifi users of 46K was more than offset by the loss of 47K Streamyx users. Nevertheless, this was still commendable as net Unifi accretion was double of Maxis’s 23K in 1QFY20 despite the movement control order.

• Against the backdrop of higher capex needs and weak nearterm earnings outlook, the stock currently trades at a fair FY21F EV/EBITDA of 5x with a decent dividend yield of 3%.

Source: AmInvest Research - 21 May 2020