Telekom Malaysia (TM) posted a 30.3% YoY decline in 2QFY24 net profit mainly due to utilisation of tax losses in the previous year, which resulted in a tax credit versus tax expense in the current quarter. For 1HFY24, the results accounted for 58% of our full-year estimates but met consensus forecast at 51%. Nevertheless, we deem the results to be in line with our expectation as the cumulative profit is inclusive of a one-off arbitration settlement received from MYTV, in which the amount was not disclosed by management. Note that in the arbitration, TM had filed for a claim of RM99.6m against MYTV. We make no changes to our FY24-26F earnings forecasts, as we are also expecting depreciation cost to increase in 2H24. TM remains our top pick in the telco space owing to its leading position as the country’s key network infrastructure provider. In addition, we believe TM is likely to be a prime beneficiary of the booming data centre industry in Malaysia. Maintain Outperform. A higher interim dividend of 12.50sen per share was declared (2QFY23: 9.50sen).

• 2QFY24 revenue was down 1.7% YoY, as the increase in data revenue was offset by lower voice revenue. Although unifi home chalked a 2% increase in subscriber base, ARPU fell from RM130 to RM128 due to more new subscribers coming in at entry-level packages with promotional discount. TM One posted a 5% increase in revenue due to higher customer projects as well as the recognition of one-off settlement received from MYTV.
• 2QFY24 net profit fell by 30.3% YoY. Total cost as a percentage of revenue increased marginally from 80.5% in 2QFY23 to 81.1% in the current quarter. The increase was mainly due to higher manpower cost,but was partly offset by lower direct cost and depreciation charges. The group has achieved RM1.26bn EBIT for 1HFY24. However, management has guided a full-year EBIT of around RM2.20bn while our forecasting is at RM2.15bn. Generally, we expect depreciation cost to increase in 2HFY24, leading to a lower profit compared to 1HFY24.
• Outlook. As part of the strategy under the MyDigital Blueprint, the Malaysian government has given approvals for Microsoft, Google, Amazon and TM to invest in hyperscale data centres. We expect more new infrastructure (i.e internet exchange points, cable landing stations and fibre optic cables) to be developed to cater for the expanding IT load. TM is seen as one of the prime beneficiaries of this booming market, as major cloud and internet companies would also demand for services connecting data centres with terrestrial as well as global subsea cable networks. We have yet to factor in any earnings contribution from its collaboration with Singtel to build a greenfield data centre in Johor, as we are only expecting this project to be accretive after FY26F. During the gestation period over the next 3 years, TM could incur start-up cost.

Source: PublicInvest Research - 27 Aug 2024