Telekom Malaysia (TM) reported a 17.7% YoY decline in 3QFY21 headline net profit to RM271.3m, mainly due to higher operating costs. Stripping out non-operating items, normalised net profit was at RM304.3m, improving by 5.3% YoY. For 9MFY21, normalised net profit of RM890.7m was within both our and market expectations. As we factor in the impact of Cukai Makmur, which will be introduced next year, our FY22F forecast is reduced by 6.6%. Hence, our DCF-based TP is revised from RM6.90 to RM6.70. We maintain our Outperform rating. We believe that TM, being the country’s largest telco service provider, should benefit from the growing demand for fibre leasing and data centre solutions in Malaysia.

• 3QFY21 revenue rose 4.2% YoY due to higher contribution from unifi and TM Wholesale. Unifi revenue increased by 11.1% YoY due to a 42.4% jump in unifi customer base on a lower ARPU of RM138 (-6.8% YoY). We attribute this to stronger demand for home connectivity during the lockdown period as people were mostly working from home. Streamyx, however, saw its subscriber base continuing to decline (- 44.4% YoY) though on a more stable ARPU of RM92. TM Wholesale posted a 4.9% increase in revenue, driven by higher IRU (indefeasible right of use) and stronger demand for data services. However, contribution from TM One was down 4.3% YoY as project rollouts were delayed during the lockdown.

• 3QFY21 normalised net profit improved by 5.3% YoY as the increase in revenue was partly offset by higher operating costs. The percentage of total cost to revenue increased from 84.8% in 3QFY20 to 86.6% in the current quarter. This was driven by higher direct cost (+10.2%), manpower cost (+4.0%), depreciation & amortisation charges (+2.6%) and other opex (+9.0%).

• Earnings adjustment. The introduction of Cukai Makmur in 2022 is expected to impact most key players in the telco sector given their high chargeable income of above RM100m. However, the taxes will be levied on individual operating entities and with TM’s earnings distributed across many operating entities in several segments, the potential impact may be more muted. We lower our FY22F earnings forecast by 6.6% as we raise our effective tax rate to account for the impact of the prosperity tax.

Source: PublicInvest Research - 26 Nov 2021