Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with an unchanged DCF-based fair value (FV) of RM6.70/share (WACC: 7.5%; terminal growth: 1.5%). Our FV implies an FY23F PE of 18.5x – near its 5-year mean of 18x. No change to our neutral 3-star ESG rating.

• We maintain our forecasts as TM’s 1HFY23 core pretax profit (CPP) of RM1,038mil (excluding exceptional items of RM128mil from RM121mil asset impairment and RM72mil one-off accelerated depreciation from assets’ useful life review net of RM46mil unrealised forex gain and RM19mil manpower optimisation cost) appears to be within expectations as it accounts for 59% of our full-year core pretax profit forecast and 61% of street’s.

• As a comparison, 1H22 accounted for 63% of FY22 CPP. We expect the group’s net profit to moderate over the following quarters against the backdrop of a voluntary separation scheme for staff and seasonally higher year-end operating costs.

• 1HFY23 net profit rose by 25% YoY to RM899mil despite a slight 1% YoY revenue increment mainly due to a RM47mil one-off recognition of tax credit from the utilisation of previously unrecognised tax losses and 14% decline in net financing cost.

• On a QoQ basis, the group’s 2QFY22 revenue increased 5% as the decline in unifi’s sales (-2% QoQ) was more than offset by growth in other business pillars especially from TM Global (25% QoQ), driven by higher data services and data centre colocation revenue. However, a one-off positive tax charge of RM83mil (vs -RM90mil in 1QFY23) mainly drove 2QFY23 net profit by 72% QoQ to RM569mil.

• Sequentially, unifi’s 1HY23 average revenue per user (ARPU) slid RM2/month to RM130/month while Streamyx declined by the same quantum to RM106/month in tandem with lower voice and value-added services.

• YoY, unifi’s 1HFY23 revenue grew 2% while wholesale rose 7%, partially offset by TM One’s decline of 12% YoY due to impact from reduced rates of large government contracts and lower value projects in delivery.

• Operationally, TM’s 1HFY23 fixed broadband subscribers climbed 7% YoY to 3.1m, with a net addition of 1.3mil unifi users that was partially offset by a 0.1mil reduction in Streamyx users. We expect this trend to continue with TM phasing out Streamyx services and migrating all users to unifi by 2025.

• TM has declared a DPS of 9.5 sen for 1HFY23, which makes up 56% of our FY23F DPS of 17 sen. This interim DPS is the highest to be paid since 2018.

• Valuation-wise, the stock is trading at a compelling FY23F PE of 14x, below its 5-year historical average of 18x, while offering a decent dividend yield of 3%.

Source: AmInvest Research - 28 Aug 2023