• Reiterate Add call on Telekom Malaysia with an unchanged RM6.80 TP, post3Q23 results. Net profit tracking ahead of our and Bloomberg estimates.

• Lower than expected tax rate post restructuring (late-2022) was key driver ofthe earnings beat. Operationally in-line at 74% of our FY23F EBITDA.

• Valuations undemanding at 12.9x FY24F core P/E and 4.6x adj FY24FEV/EBITDA. Street upgrades, higher dividends are key catalysts in our view.

9M23 Core Net Profit Ahead at 82% of Our Full-year Estimate

• Telekom Malaysia’s (TM) 3Q23 core net profit (assuming tax rate of 23%) of RM397m (-5.6% qoq) brought 9M23 core net profit (CNP) to RM1,145m, representing 82% of our full-year estimate and 87% of Bloomberg consensus’.

• A positive tax was recorded in 3Q23 as TM continued to utilise tax losses and capital allowances following the restructuring which was completed in late-2022.

• Underlying performance was in-line, with 9M23 EBITDA of RM3,767m representing 74% of our full-year estimate. RM41m in manpower rationalisation expenses recognised in 3Q23 was mitigated by a RM27m reversal of 5G device costs in 3Q23.

Takeaways From the Results Call

• Management confirmed that as it had anticipated the lower wholesale fibre broadband prices (with negotiations concluded in Nov), this is already largely reflected in the 9M23 earnings. Any adjustments in 4Q23 are likely to be insignificant, in our view.

• Management did not deny that TM could beat its RM1.8bn-2.0bn EBIT guidance.

• Management confirmed that following TM’s announcement of its new retail broadband prices in Nov, downtrading activity had been manageable. We believe TM’s 6-month free speed upgrade to customers will limit downtrading as customers will not need to be coerced into taking higher speeds which they may not have experienced otherwise.

Valuations Undemanding; Dividends and Upgrades to Drive Rerating

• At 12.9x core FY24F P/E and 4.6x adj FY24F EV/EBITDA, TM’s valuations are undemanding vs. domestic peers (see Fig. 2) and its historical trading range with EV/EBITDA at -0.5 s.d. of its trading range since 2018 (major regulatory price change).

• Tax savings could, in our view, spur street upgrades, as well as pave the way for higher dividends. Assuming 0% effective tax and a 55% dividend payout, similar to FY22, DPS could rise to 26.5 sen based on our estimates, all else being equal.

• Key downside risks, in our view, would be a sharp pick-up in retail broadband price competition, and changes in the tax situation causing tax rates to rise.

Source: CGS-CIMB Research - 28 Nov 2023