Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with a slightly lower DCF-based fair value of RM7.08/share (from an earlier RM7.10/share) based on a WACC of 6.2%, terminal growth rate of 2% and neutral ESG rating of 3 stars. This implies an FY22F EV/EBITDA of 6x, which is half of Maxis’.

• Our lower DCF stems from an 11% reduction in FY22F net profit 11% due to the impact of the prosperity tax for taxable income above RM100mil.

• However, our FY21F and FY23F earnings are unchanged as TM’s 9MFY21 normalised net profit of RM891mil (+12% YoY) came in within expectations, accounting for 80% of our FY21F net profit and 78% street’s.

• As a comparison, 9M earnings accounted for 81%–83% of the past 3 years’ full-year earnings, which tend to be impacted by seasonally higher year-end expenses in 4Q. Also, we expect a higher deferred tax charge in 4QFY21 from the impact of 2022 prosperity tax on accelerated depreciation. The group did not declare a second interim dividend, as expected.

• YoY, 9MFY21 operating costs rose 7% YoY to RM5.3bil from higher customer acquisition and installation costs together with voluntary separation schemes and staff benefits for employees and depreciation.

• TM’s 9MFY21 capex rose 9% YoY to RM959mil, translating to 11% of revenue vs. management’s unchanged FY21F capex/revenue ratio of 14%–18%. Hence, we expect a 4QFY21 escalation in capital spending.

• Our forecasts remain on track even with management’s improved FY21F guidance for a low-to-mid single digit revenue growth, up from an earlier flat-to-low single-digit revenue increase. Also, FY21F EBIT guidance has been finetuned to RM1.7bil–RM1.8bil, from just over RM1.6bil.

• QoQ, TM’s 3QFY21 revenue increased slightly by 2% to RM2,803bil from higher unifi accretion and wholesale data demand, partly offset by slower project rollouts and decreased voice for TM One.

• Together with operating expenditures rising slower by 1% QoQ, normalised EBITDA climbed by 2% to RM1,049mil, which drove 3QFY21 core net profit up by 19% QoQ to RM304mil.

• The group achieved another consecutive record with a 3QFY21 unifi subscriber QoQ increase of 208K, 5.3x Maxis’ 25K. This raised TM’s subscriber base to 2.3mil, which together with 342K Streamyx users (-18% QoQ) and fixed line subscribers rising 5% QoQ to a total of 2.6mil.

• 3QFY21 average revenue per user (ARPU) slid by RM3/month QoQ to RM138/month for unifi from lower-entry subscriptions while Streamyx rose by RM1/month to RM92/month.

• 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 FY22F EV/EBITDA of 5x vs. Maxis’ 12x.

Source: AmInvest Research - 26 Nov 2021