Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with a higher DCFbased fair value of RM6.10/share (from RM5.05/share) based on a lowered WACC of 6.7% from 7.4% following a 1ppt cut in the group’s cost of debt to 4.5%. This implies an FY21F EV/EBITDA of 6.5x — at 2 standard deviations to its 3-year average of 5.3x.

• While awaiting an analyst briefing later today, our forecasts have been fine-tuned to adjust for the reduction in our FY20F capex/revenue assumption to 15% from 20%, in line with management’s 12–15% guidance. Nevertheless, TM’s 9MFY20 normalised net profit of RM508mil (excluding forex losses and impairments of financial assets) came within our expectations.

• As our FY20F–FY22F earnings are 11%–14% above street’s, the results beat market expectations. TM’s 9MFY20 core net profit accounts for 75% of our FY20F net profit but 87% of street’s – well above the 74%–83% range for 9M over the past 3 years.

• We also maintain our FY20F–FY22F DPS which is based on the maximum range of the group’s 40%–60% guidance with TM not declaring any 3QFY20 dividend as expected. This translates to a 9MFY20 DPS of 6.8 sen and payout ratio of 34%, entirely from 2QFY20 distribution.

• TM’s 3QFY20 normalised earnings rose by 8% QoQ to RM289mil in tandem with a 4% increase in revenue to RM2.7bil, driven by higher international & domestic voice, unifi and wholesale data. The higher revenue boosted 3QFY20 pretax profit margin by 2ppt to 15.4%, partly offset by a 2ppt rise in effective tax rate to 23%.

• The group’s fixed broadband subscribers rose by 37K QoQ as a 97K increase in unifi users to 1.6mil was partly offset by a 60K fall in Streamyx to 616K. This has substantively outpaced Maxis’ home fibre and business subscriber increase of 13K to 424K in 3QFY20. However, average revenue per user (ARPU) slid RM2/month QoQ to RM148/month for unifi but rose RM2/month to RM92/month for Streamyx, partly mitigating the group’s revenue growth.

• Overall 9MFY20 operating costs are still declining due to the group’s Performance Improvement Programme (PIP), but at a slower pace of 6% YoY to RM6.7bil vs. 21% YoY for 9MFY19. This is partly offset by the 19% increase in 9MFY20 capex to RM879mil. Other than the lower capex guidance, management has maintained its FY20F expectations for a low-to-mid singledigit revenue decline due to the full-year impact of Streamyx repricing on the retail segment, while narrowing EBIT to RM1.3bil–RM1.5bil.

• The stock currently trades at an attractive FY21F EV/EBITDA of 5x with a compelling dividend yield of 4%. 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 - 25 Nov 2020