Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with a higher DCF-based fair value (FV) of RM7.24/share (previously RM7.08/share) due to higher earnings forecasts. Our FV is derived from a higher WACC of 8% (previously 7%) together with unchanged terminal growth rate of 1.2% and a neutral 3-star ESG rating.

• TM’s 1HFY22 core net profit of RM805mil exceeded expectations, accounting for 76% of our FY22F earnings estimate and 72% of street’s. For comparison, 1H accounted for 51%–58% over the past 3 years.

• As the group’s cost optimisation initiatives continue to bear fruit, we reduce our FY22F operating cost assumptions by 7%, which lead to a 30% increase in FY22F–FY24F earnings.

• The group posted strong 2QFY22 revenue growth of 12% YoY to RM3.1bil as all business segments contributed positively to its top line. Coupled with better controlled spending, 2QFY22 core net profit of RM451mil (excluding a 33% prosperity tax provision) surged 77% YoY.

• On a QoQ basis, group revenue grew 7% as EBIT jumped by 26% to RM698mil, thanks to better cost optimisation.

• Capex increased 39% YoY to RM485mil, translating to 16% of revenue vs. 13% in 2QFY22. We maintain our FY22F capex/revenue forecast of 18%, at the higher end of management’s guidance of 14%–18%, as the group historically incurred lower capex in 1H vs. escalated spending in 2H.

• In terms of business operations, TM’s 2QFY22 fixed broadband subscribers climbed by 68K QoQ, with unifi users surging 125K to 2.8mil, partly offset by a 57K decline in Streamyx users to 157K. We expect this trend to continue with TM phasing out its Streamyx services and migrating all its users to unifi by 2025.

• unifi’s 2QFY22 average revenue per user (ARPU) increased RM1/month QoQ to RM137/month while that of Streamyx edged up RM2/month to RM97/month.

• Meanwhile, TM One’s 2QFY22 revenue rose 4% YoY and 8% QoQ on increasing demand in business solutions and ICT services. We expect the momentum to continue as delays in project deliveries resulting from supply chain disruptions continue to ease.

• Moreover, TM wholesale revenue expanded at a faster rate of 26% YoY on higher indefeasible rights of use (IRU) deals, coupled with greater demand for data from both domestic and international markets.

• All in all, 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.

• The blue-chip stock currently trades at a compelling FY23F PE of 13x vs. a 5-year average of 18x and offers a fair dividend yield of 2.5%.

Source: AmInvest Research - 25 Aug 2022