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 6.8% and terminal growth rate of 1% This implies an FY21F EV/EBITDA of 6.6x — at 2 standard deviations to its 3- year average of 5.3x.

• Our FY21F–FY22F earnings have been marginally tweaked as TM’s FY20 core net profit of RM991mil came in within our and market expectations. Our forecasts are also in line with management’s FY21F guidance for a flat to low single-digit revenue increase, EBIT of over RM1.6bil and capex to revenue ratio of 14%–18%. We introduce FY23F earnings premised on a revenue growth rate of 2%.

• However, the group declared a final 4QFY20 dividend of 7.5 sen, which brings FY20 DPS to 14.3 sen, translating to a payout ratio of 53% vs. 60% in FY19 and management’s guidance of 40%– 60%. As this was 16% below our forecasts, we have lowered our FY21F–FY23F dividend payout assumptions to 50%. Also, management appears to be conserving cash for higher capex requirements for the rollout of 5G services and NFCP priorities.

• QoQ, TM’s 4QFY20 revenue rose 12% on higher indefeasible rights of use (IRU) contract sales, higher customer projects for TM One and stronger unifi revenue. However, 4QFY20 operating expenditures rose at a faster rate of 15% QoQ from customer projects, year-end provisions for staff and direct costs, which caused normalised EBITDA to decrease by 7%. Together with a 5-percentage point rise in effective tax rate to 28%, 4QFY20 net profit dropped 33% QoQ to RM194mil.

• The group’s fixed broadband subscribers rose by 69K QoQ as a 128K increase in unifi users to 1.8mil was partly offset by a 59K fall in Streamyx to 557K. Average revenue per user (ARPU) climbed by RM5/month QoQ to RM153/month for unifi from device sales while Streamyx was flat at RM92/month.

• Overall 4QFY20 operating costs rose 15% QoQ on lumpy yearend spending, preventive maintenance and provisions. Additionally, 4QY20 capex surged 52% QoQ to RM607mil, which brings FY20 capex to RM1.5bil (+9% YoY) – 15% of revenue. Nevertheless, the overall trend remains on a downward trajectory as FY20 opex shrank by 7% YoY in tandem with management’s ongoing cost optimisation drive.

• Given TM critical role in Malaysia’s MyDigital Initiative with its ownership of the High Speed Broadband network, we expect a faster pace of growth for its wholesale revenue beyond FY21F. Likewise, TM One’s revenue growth could also be accelerated by the group’s appointment as the sole Malaysian cloud provider for government data.

• The stock currently trades at an attractive FY21F EV/EBITDA of 6x with a fair dividend yield of 2%. In our view, TM can be rerated even further if it opts to consolidate with mobile and fibre players (see Sector Update on 11 Aug 2020). TM is also ESG compliant with a 4-star rating on the FTSE4GOOD Index.

Source: AmInvest Research - 25 Feb 2021