Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM7.08/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.

• While our FY23F–FY24F earnings are maintained, we have lowered FY22F earnings on accelerated depreciation charges. This stems from the underperformance of TM’s FY21 normalised net profit of RM1,016mil (+3% YoY), which excludes only forex and fair value losses, appearing to come in 8% below our forecast and 10% lower than consensus.

• As FY21 recorded net profit fell 12% YoY to RM895mil, the group’s 4QFY21 dividend decreased 1.5 sen YoY to 6 sen, bringing FY21 DPS to 13 sen (-9% YoY).

• However, omitting one-off impairments of RM100mil and accelerated depreciation of RM22mil for the group’s cellular assets together with flood aid relief of RM30mil and deferred prosperity tax provision of RM20mil in 4QFY21, we highlight that TM’s FY21 underlying earnings would instead have been 7% above our estimate and 6% above street’s.

• YoY, FY21 operating costs rose 7% YoY to RM10bil from higher customer acquisition and installation costs together with voluntary separation schemes and staff benefits for employees and depreciation.

• QoQ, TM’s 4QFY21 revenue surged by 12.5% to RM3.2bil from lumpy customer-driven project rollouts, increased unifi accretion and stronger wholesale data demand. This drove up 4QFY21 EBITDA by 17% QoQ to RM1.2bil.

• However, impairments, accelerated depreciation and a tripling of effective tax rate to 65% arising from deferred provisions for 2022 prosperity tax caused 4QFY21 normalised net profit to drop 58% to RM129mil. Excluding these exceptional items, 4QFY21 underlying earnings would have been flat QoQ.

• While TM’s unifi subscriber growth slowed down to 154K in 4QFY21 from 208K in 3QFY21, the base still increased by 7% QoQ to 2.5mil. This was likely partly supported by migration from Streamyx users, which contracted by 64K QoQ to 278K.

• 4QFY21 average revenue per user (ARPU) rose by RM3/month QoQ to RM141/month for unifi from higher end customers while that of Streamyx climbed by RM1/month to RM93/month.

• For FY22F, TM maintains a low-to-mid single-digit revenue growth guidance in line with our assumption of 4%. Having achieved an FY21 normalised EBIT of RM1.8bil, management’s FY22F target above this threshold should be easily achievable.

• TM’s FY21 capex expanded 9% YoY to RM1.7bil, translating to 14.7% of revenue, on the lower range of management’s unchanged guidance of capex/revenue ratio of 14%–18%. The same capex guidance for this year is within our conservative estimate of 18% of revenue for FY22F–FY24F.

• Looking forward, we are positive on TM’s critical role in Malaysia’s MyDigital Initiative with its ownership of the HighSpeed Broadband network that will underpin a faster pace of growth for the group’s wholesale revenue. Likewise, TM One’s revenue growth could also be accelerated over the longer term by the group’s appointment as the sole Malaysian cloud provider for government data.

• For a nationwide fibre operator offering convergent telecommunication services, the stock currently trades at an unjustified FY22F EV/EBITDA of 5x vs. cellular operators’ 11x–12x.

Source: AmInvest Research - 28 Feb 2022