Telekom Malaysia (TM)’s 1Q20 core net profit fell by 19% yoy to RM288m due to lower revenue (-8%) in all business segments, but this was partly cushioned by a low effective tax rate of 12%. Operationally, TM’s results were within our expectations but core net profit was ahead of consensus and our forecasts due to the lower tax. We maintain our earnings forecasts but raise our DCF-derived TP to RM3.55 after rolling forward our valuation horizon. After a 28% price gain in the past two months, TM is now trading at 24.7x 2021E PER, and looks pricey considering its declining revenue/earnings due to stiff competition. Downgrade to SELL on rich valuation and its uninspiring earnings outlook.

1Q20 EBIT Declined by 35% Yoy Due to Lower Revenue

TM’s 1Q20 revenue fell by 8% yoy to RM2.56bn due to lower contribution across all segments (Fig 1). Consequently, the group’s 1Q20 EBIT fell by a sharp 35% yoy to RM335m, its lowest since 4Q18. However, cushioned by a low effective tax rate of 12.2% (due to deferred tax adjustment), TM’s core net profit declined by a milder 19% yoy to RM241m. Operationally, the results were within our expectations but the core net profit was ahead of consensus and our forecasts due to the low tax rate. TM’s 1Q20 core net profit accounted for 28.5% and 34.6% of the consensus and our full-year forecasts, respectively. We expect TM’s effective tax rate to normalise in the coming quarters.

Number of Internet Subscribers Stable at 2.18m

The number of TM’s internet subscribers was stable at 2.184m (-1k qoq) as a decline in Streamyx subscribers (-47k qoq to 694k) was offset by a 46k increase in Unifi subscribers (to 1.49m). The Streamyx ARPU slipped by RM5 qoq to RM91/month (-RM23 yoy) due to the price cut in September 2019, while the unifi ARPU was unchanged qoq at RM153/month (-RM19 yoy). Management sees some downward pressure on the Unifi ARPU but does not expect the decline to be material.

Management Did Not Provide Earnings Guidance, Commits to Capex Plan

Management did not provide earnings guidance due to uncertainties on the length and severity of the Covid-19 pandemic. To recap, management’s earlier guidance was to achieve EBIT of “over RM1bn”. TM remains committed to its capex guidance of low to mid-20% of revenue. The group has spent RM262m of capex in 1Q20 (10.2% of revenue) and plans to reaccelerate the capex rollout after the lifting of the MCO.

Source: Affin Hwang Research - 22 May 2020