Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with a slightly lower DCF-based (WACC: 8.5%; terminal growth: 1.5%) fair value (FV) of RM7.20/share (previously RM7.24/share) after revising FY23F-FY24F earnings. Our FV implies an FY23F PE of 18x – near 5-year mean of 17.8x. No change to our neutral 3-star ESG rating.

• TM’s 9MFY22 core net profit of RM1,011mil is largely in line with our expectation but above consensus. It accounts for 76% of our full-year FY22F earnings estimate and 81% of street’s. Nevertheless, we reduce FY23F-FY24F earnings by 7%-10% due to housekeeping exercises without any changes to FY22F.

• The group posted robust 3QFY22 revenue growth of 13% YoY to RM3.2bil as all business segments contributed positively to its topline. Coupled with better-controlled spending, this trickled down to EBIT level, which surged 38% YoY. However, TM’s PATAMI came out lower at RM241mil (-20% YoY), dragged by prosperity tax provision, which drove 3QFY22 effective tax rate to 43% from 23% in 3QFY21.

• On a QoQ basis, the group’s 3QFY22 revenue grew 2% but higher costs across all key items dragged EBIT lower by 3% to RM607mil. Exacerbated by the impact of prosperity tax, core net profit declined sequentially by 29%.

• The group’s 3QFY22 capex increased 13% YoY to RM603mil, translating to 19% of revenue vs. 16% in 2QFY22. We maintain our FY22F capex/revenue at 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 3QFY22 fixed broadband subscribers climbed by 64K QoQ, with a net addition of 115k unifi users that was partially offset by a 51K reduction in Streamyx users. We expect this trend to continue with TM phasing out its Streamyx services and migrating all users to unifi by 2025.

• unifi’s 3QFY22 average revenue per user (ARPU) dropped RM5/month QoQ to RM132/month while Streamyx’s improved RM3/month to RM100/month

• Meanwhile, TM One’s 3QFY22 revenue rose 5% YoY and 4% QoQ on increasing demand for business solutions and ICT services across large enterprises and government sectors.

• Valuation-wise, the stock is trading at a compelling 14x, below its 5-year historical average of 17.8x while offering a decent dividend yield of 3%.

Source: AmInvest Research - 23 Nov 2022