Telekom Malaysia (TM)’s 2019 core net profit grew by 58% yoy to RM1bn on better cost efficiency, adoption of MFRS 16 and the recognition of land sales. Broadly, the results were within market and our expectations. However, management gave a rather cautious earnings guidance for 2020; management expects TM’s 2020 revenue to decline by low- to midsingle digits and EBIT to come in at only “more than RM1.0bn” (2019A: RM1.7bn). Taking a cue from management’s cautious guidance, we cut our 2020-21E EPS forecasts by 19-23% and lower our DCF-derived price target to RM3.70. Maintain HOLD.

2019 core net profit grew by 58% yoy to RM1bn, within our expectations

Notwithstanding a 3.3% decline in its 2019 revenue, TM’s 2019 core net profit grew by 58% yoy to RM1bn on a higher EBIT margin (+5.6 ppt to 14.9%), attributable to improved cost efficiency, adoption of MFRS 16 (Fig 2) and a gain from disposal of land. Headline net profit was lower at RM633m due to the recognition of a RM234m fair-value loss on its subscription of Exchangeable MTNs issued by Green Packet Berhad. TM declared a 10 sen dividend for 2019, a sharp increase from 2 sen in 2018. Overall, the results were within market and our expectations.

“Pay Nothing” Campaign Has Helped to Attract / Retain Subs

TM’s internet subscribers grew by 25k qoq from 2,159k households in 3Q19 to 2,184k in 4Q19, as the increase in Unifi subs (+71k to 1,444k) has outpaced the decline in Streamyx subs (-45k to 741k). Notably, this is TM’s first sequential increase in the number of internet subs since 2Q17, attributable to its aggressive “Pay Nothing” Campaign launched in 4Q19. Notwithstanding the increase in total number of subscribers, TM’s 4Q19 internet revenue slipped by 6% qoq due to lower internet ARPU.

A Vague, Cautious Earnings Guidance for 2020

Moving into 2020, TM expects its 2020 revenue to fall by low- to mid-single digits and EBIT to be “more than RM1.0bn”. In the results call, management declined to provide further details on its 2020 EBIT guidance, reiterating its EBIT to be “more than RM1.0bn”. Against its 2019 EBIT of RM1.7bn, we view the earnings guidance as a cautious note on TM’s 2020 profitability. Elsewhere, management has guided for a capex of low-to-mid 20% of revenue, a sharp increase from the 2019 capex of RM1.36bn (12% of revenue). Awaiting further details from MCMC, management gave little in terms of updates on its 5G plan.

Cutting 2020-21E EPS Forecasts by 19-23%

Taking a cue from management’s cautious 2020 earnings guidance and high capex plans, we have cut our 2020-21E EPS forecasts by 19-23%, incorporating: (i) steeper yoy decline in 2020 revenue (-3.9%) due to lower internet ARPU; (ii) lower EBIT margin of 13% (from 15%) in 2019; and (iii) higher depreciation and finance costs after incorporating a higher capex for 2020-21E. We introduce our 2022 earnings forecasts, expecting TM to reverse the earnings contraction with a subdued 3.6% earnings growth on stabilised internet revenue.

Maintain HOLD With a Lower TP of RM3.70

In tandem with our earnings cuts, we have lowered our 12-month price target of RM3.70 (from RM4.20) based on DCF valuation (7.5% WACC. 1.5% LTG). TM now trades at 18x 2020E PER, below its 7-year average PER of 23.5x, which looks fair, considering its weak revenue and profit outlook, and rising competition in the fixed broadband and enterprise market.

Key Risks

Key upside risks: (i) robust subscriber growth in the Unifi and Enterprise business segments; and (ii) stronger-than-expected quarterly earnings from further cost optimisation / higher revenue contributions from other businesses. Downside risks include: (i) a sharp decline in the number of Streamyx subscribers / low growth in Unifi subscribers due to higher competition; (ii) rising competitions in the enterprise business: and (iii) higher-than-expected opex / capex commitment.

Source: Affin Hwang Research - 24 Feb 2020