Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM7.10/share based on a WACC of 6.2% and terminal growth rate of 2% This implies an FY21F EV/EBITDA of 7.4x – which is 43% below Maxis.

• Our forecasts are maintained pending TM’s 4QFY20 results announcement, expected on 24 February 2021. We recently attended TM’s Investor & Analyst Series with TM Wholesale executive vice president Amar Huzaimi Md Deris and corporate finance & investor relations vice president Delano Abdul Kadir. These are the salient highlights:
  • TM Wholesale, the domestic and international wholesale arm of the group, accounted for 20% of 9MFY20 group revenue. This segment’s growth is being driven by higher international voice together with domestic and global data, which support a slightly higher 9MFY20 EBIT margin of 17% vs. the group’s average 15%.
     
  • The wholesale division is leveraging its fixed play dominance provided by its national fibre-optic network and extensive partnerships with regional edge computing nodes, offering content delivery network gateways for over-the-top (OTT) providers such as Amazon and Netflix. Currently, TM provides connectivity to 5 nodes in Malaysia, 43 in Asean and 66 globally.
     
  • Even though data centres are becoming increasingly important on the back of escalating data demand requirements, the group expects to moderate its investments via strategic eco-system partnerships with third parties by providing the needed connectivity to its extensive national fibre-optic network.
     
  • TM also does not expect substantive capex increases to expand its submarine capacity, which is needed to support the wholesale indefeasible rights of use (IRU) to other telco operators. This stems from the group leveraging its national infrastructure to secure reciprocal arrangements with undersea fibre owners/partners for connectivity in Malaysia and the region.
     
  • Hence management is optimistic that the sale of IRU could be seasonally higher in TM’s 4QFY20 results. As a comparison, 4QFY19 accounted for 27% of FY19 revenue. We note that the group’s 9MFY20 normalised earnings already account for 80% of FY20F consensus earnings, currently 3% below our forecast. As such, we believe that TM’s FY20F earnings could come in above market expectations.
     
• The stock currently trades at an attractive FY21F EV/EBITDA of 7x vs. Maxis’s 13x. 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). It also offers a compelling dividend yield of 4%. TM is also ESG compliant with a 4-star rating on the FTSE4GOOD Index.

Source: AmInvest Research - 29 Jan 2021