Telekom Malaysia (TM)’s 1H23 net profit of RM873mn was above our and consensus expectations accounting 75.1% and 66.6% of full year forecast respectively. Core earnings increased by 7.7% YoY due to lower financing cost and recognition of tax credits. We remain bullish on TM’s business prospects namely Unifi and TM Wholesale divisions. Maintain a BUY call at a new TP of RM6.97, as we roll forward our valuation to 2024; based on DCF-derived valuation with unchanged WACC of 7.4% and lower terminal growth of 1.0% from 1.4% as we foresee a moderation in fixed broadband ARPU going ahead.

• Above expectations. 1H23 net profit of RM873mn was above our and consensus expectations accounting for 75.1% and 66.6% of full year forecast respectively. The variance was largely due to the lower-thanexpected tax.

• Dividend. TM has declared a higher DPS of 9.5 sen in 1HFY23 (vs 1HFY22: 9.0 sen), which represents 59.4% of our estimated FY23 DPS of 16.0 sen.

• QoQ. TM's 2Q23 revenue rose by 5.0% QoQ due to better revenue from all services except Internet and multimedia services. Meanwhile, TM's earnings jumped by 67.5% QoQ due to lower operating costs, as well as the recognition of deferred tax credits in the current quarter arising from the group's tax losses that were previously not recognized.

• YoY/ YTD. The top-line increased by only 1.1% YoY, driven by better contributions from non-telecommunication related services, internet and multimedia services, as well as other telecommunication related services. In tandem, core earnings grew by 7.7% YoY due to lower financing costs and the recognition of tax credits from previously unrecognised tax losses. Segment-wise, Unifi's top-line grew by 2.4% YoY to RM2,845mn in 1HFY23, primarily attributed to the increased total fixed broadband subscribers propelled by improved marketing campaigns and tailored offerings that cater to customer requirements. However, Unifi’s ARPU trended lower at RM130 in 2Q23 compared to RM137 in 2Q22.

• Outlook. We remain bullish on TM's business prospects, particularly in the Unifi and TM Wholesale divisions. Regarding 5G development, note that TM has exceeded the target for deploying 5G backhaul sites. This achievement not only contributes to the national agenda but also accelerates digital inclusivity within the dual networks’ framework. TM Wholesale stands to benefit from DNB's 4G and 5G network infrastructure development, leveraging TM's extensive nationwide network infrastructure. A potential downside risk to our assessment includes the stiff competition from other service providers.

• Forecast: We have raised our FY23/FY24 forecasts by 8.1%/6.8% to account for the changes in tax provision, as new information from TM indicates that the tax provision will remain low in the next few quarters.

• Our call. Maintain BUY at a new TP of RM6.97 (from RM7.58) as we rolled forward our valuation to 2024. Despite higher earnings forecast, we lowered our TP based on DCF-derived with unchanged WACC of 7.4% and lower terminal growth of 1.0% (from g:1.4%) as we foresee a moderation in fixed broadband ARPU going ahead.

Source: BIMB Securities Research - 28 Aug 2023