Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with an unchanged DCF-based fair value (FV) of RM7.08/share, derived from WACC of 7%, terminal growth rate of 1.2%. We continue to ascribe a neutral 3-star ESG rating to TM.

• TM’s 1QFY22 core profit of RM345mil accounted for 32% of our FY22F earnings estimate and 31% of street’s. However, we deem the results within expectations and are maintaining our forecasts as it lies within the group’s 3- year range of 25%–33% for 1Q contribution.

• YoY, the group’s net profit rose 4% to RM340mil, primarily driven by lower finance cost following the group’s early redemption of its RM2bil sukuk in March 2021. TM has also applied the 33% prosperity tax rate for 1QFY22, which we have removed in deriving our underlying earnings.

• On a QoQ basis, omitting one-off items in 4QFY21 such as impairments of RM100mil, accelerated depreciation of RM22mil on group’s cellular assets, flood aid relief of RM30mil and deferred prosperity tax provision of RM20mil, the group still managed to book a remarkable increase of 37% in core earnings, thanks to better cost optimisation.

• Capex increased 46% YoY to RM361mil, translating to 12% of revenue vs. 9% in 1QFY22. We maintain our FY22F capex/revenue forecast of 18%, at the higher end of management’s guidance of 14%–18%, as the group has historically incurred lower capex in 1Q with escalated spending in 4Q.

• In terms of business operation, TM’s 1QFY22 fixed broadband subscribers climbed by 70K QoQ, with Unifi users surging 134K to 2.6mil, partly offset by a 64K decline in Streamyx users to 214K. We expect this trend to continue with TM phasing out its Streamyx services and migrating all its users to Unifi by 2025.

• Unifi’s average revenue per user (ARPU) slid RM5/month QoQ to RM136/month from lower entry subscriptions while that of Streamyx edged up RM2/month to RM95/month.

• Meanwhile, TM One’s revenue continue to decline, falling 8% YoY and 6% QoQ as a delayed economic recovery hindered customer project plans. In addition, project delivery continued to be challenged by global semiconductor shortages.  

• On the other hand, TM wholesale revenue slid 19% QoQ to RM625mil on lower indefeasible rights of use (IRU) deals, coupled with lower data utilisation by organisations and businesses.

• Nonetheless we remain upbeat on TM’s outlook given its critical role in the MyDigital Initiative with its ownership of the High Speed Broadband network, which underpin a faster pace of growth for its wholesale revenue beyond FY22F. Likewise, TM One’s revenue growth could also accelerate with the group’s appointment as the sole Malaysian cloud provider for government data.

Source: AmInvest Research - 26 May 2022