Investment Highlights

• We upgrade our call on Telekom Malaysia (TM) to BUY from HOLD with a higher DCF-based fair value of RM5.05/share (from an earlier RM4.15/share) based on a WACC of 7.4% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 6x — at 1 standard deviation to its 3-year average of 5.5x.

• We raise TM’s FY20F–FY22F earnings by 23%–28% as its 1HFY20 normalised net profit of RM508mil (excluding forex losses and impairments of financial assets) came above our and street’s expectations. The group’s 1HFY20 core net profit accounts for 61% of our and street’s FY20F net profit, well above the 41%–52% range for 1H over the past 3 years.

• The group also declared an interim dividend of 6.8 sen, after 2 years without a half-yearly payout. This translates to a 1HFY20 payout ratio of 60%, which is at the maximum range of the group’s 40%–60% guidance. As such, we have raised our FY20F–FY22F payout assumption to 60% from 38%, translating to a compelling yield of 4.5%.

• TM’s 2QFY20 normalised earnings rose by 11% QoQ to RM268mil on a slight 1% increase in revenue to RM2.6bil, supported by wholesale and indefeasible right of use (IRU) sales. The doubling of pre-tax margins to 13% stems from a 6% reduction in manpower costs and 8% one-off drop in depreciation charges. unifi’s 2QFY20 operating profit surged 83% QoQ to RM154mil and TM Global increased 12%, partly offset by TM One declining 10%.

• The group’s fixed broadband subscribers rose by 43K QoQ as a 61K increase in unifi users to 1.5mil was partly offset by an 18K fall in Streamyx’s. This has substantively outpaced Maxis’ home fibre and business subscriber increase of 19K in 2QFY20. However, average revenue per user (ARPU) slid RM3/month to RM150/month for unifi and RM1/month to RM90/month for Streamyx, partly mitigating the group’s revenue growth.

• Overall 1HFY20 operating costs are still declining due to the group’s Performance Improvement Programme (PIP), but at a slower pace of 8% YoY to RM4.4bil vs. 11% YoY for 1HFY19. However, the operational cost savings could be offset by higher capex, which slid 17% QoQ to RM217bil in 2QFY20.

• This could rise over the next 2 quarters as 1HFY20 spending only accounted for 9.3% of revenue vs. management’s unchanged guidance of a low-to-mid-20s%. Additionally, management indicated that TM has not withdrawn its guidance for a low-to-mid single-digit FY20F revenue decline due to the full-year impact of Streamyx repricing on the retail segment.

• Following our earnings revision, the stock currently trades at an attractive FY21F EV/EBITDA of 5x with a decent dividend yield of 4.5%. In our view, TM can be re-rated even further if it opts to consolidate with mobile and fibre players (See our Sector Update on 11 August).

Source: AmInvest Research - 28 Aug 2020