Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM6.10/share based on a WACC of 6.7% and terminal growth rate of 2% This implies an FY21F EV/EBITDA of 6.5x — at 2 standard deviations to its 3- year average of 5.3x.
• Our forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:
  • Management has adopted a prudent stance on its refined FY20F EBIT guidance of RM1.3bil–RM1.5bil as an annualised 9MFY20F EBIT of RM1.2bil translates to a higher RM1.6bil. This stems from TM’s concern of potential risks to revenue slowdown and cost escalations against the backdrop of the current third wave of the Covid-19 outbreak.
  • TM does not expect any further impact from Streamxy repricing, which occurred late in 2019 and has led to 9MFY20 revenue contracting by 6.7% YoY, as the current year will be the baseline for revenue growth going forward.
  • With TM Global growing by 7% QoQ in 3QFY20, the group expects wholesale revenue to continue to expand with new contracts secured for indefeasible rights of use (IRU) for crossocean connectivity, backhaul and content delivery services with domestic mobile operators and foreign OTT operators. We note that TM tends to seasonally register the highest IRU sales in the fourth quarter of the year.
  • Management’s unchanged FY20F revenue guidance of a lowto-mid single digit decline implies a double-digit QoQ growth in 4QFY20 given the high 6.7% YoY contraction in 9MFY20. Even so, this could be partly offset by voice revenue, which rose at an impressive 11% QoQ in 3QFY20, moving towards normalcy as subscribers return to the workplace.
  • The group continues to expect further reductions in expenditures from its Performance Improvement Programme which focuses on cost optimisation, productivity/process enhancements and automation. The group has frozen staff recruitment and expects normal attrition of 800–1,000 workers over the next few years.
  • For 4QFY20, subscriber rates are expected to continue increasing from new users operating under work-from-home and business-from-home platforms. In 3QFY20, unifi users rose at a commendable 97K, exceeding Maxis’ 13K.
  • TM’s capex/revenue is expected to rise further from 12%–15% in FY20F from additional focused and targeted spending on access, fiberisation and core network in line with the government’s Jendela programme to connect under-served areas. This is in line with our unchanged FY21F capex/revenue assumption of 20%.
• 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 - 26 Nov 2020