• 2Q20 core net profit grew by 11% qoq to RM267.6m on stable revenue (+1.4% qoq), lower manpower costs and lower depreciation charges. The group declared an interim dividend of 6.8 sen (nil in 6M19).
• Cumulatively, 6M20 core net profit of RM508m (-2.8% yoy) was above market and our expectations due to good cost control, better-thanexpected internet revenue and a lower effective tax rate.
• We raise our FY20-22E EPS forecasts by 8-24% and increase our price target to RM5.00 (from RM4.60). Upgrade to BUY on improved earnings outlook and attractive valuation of 20x 2021E PER.

Robust revenue, lower manpower / depreciation costs drive 2Q20 earnings

TM’s 2Q20 revenue was stable at RM2.59bn (+1.4% qoq), driven by higher global voice and data revenue (higher IRU sales) that more than offset weaker internet, ICT and BPO contributions. The higher revenue, lower manpower costs (-5.9% qoq), and lower depreciation / amortisation expenses (-8.2% qoq due to a one-off adjustment) lifted TM’s 2Q20 earnings by 11% qoq to RM267.6m. TM declared an interim dividend of 6.8 sen (nil in 6M19).

6M20 Core Net Profit of RM508m (-2.8% Yoy) Was Above Expectations

TM’s 6M20 core net profit fell by 2.8% yoy to RM508.4m due to weaker revenue across all segments (voice, data, internet and others), partly cushioned by lower operating costs and a lower effective tax rate of 20%. During 6M20, the voice segment reported the steepest revenue decline of 16% yoy (structural downtrend), followed by a 9.8% decline in other businesses (ICT, BPO) and 4.5% decline in the internet segment (lower Streamyx contribution). Despite the weaker revenue yoy, TM’s 6M20 core net profit of RM508m was above street and our expectations (61% of the street’s and 73% of our full-year earnings forecasts) due to better-thanexpected cost control, a lower effective tax rate and resilient internet revenue.

Internet Revenue Held Up Better Than Expected

Despite a higher number of internet subscribers (2.23m in 2Q20, +2.0% qoq / +3.0% yoy), 2Q20 internet revenue fell by 1.6% qoq (-4.8% yoy) to RM921m due to lower internet ARPUs. Unifi ARPUs fell to RM150 in 2Q20 (from RM153 in 1Q20 / RM169 in 2Q19) while Streamyx ARPUs fell to RM90 (from RM91 in 1Q20 / RM113 in 2Q19). That said, TM’s internet ARPUs are holding up better than expected – we had earlier expected a steeper decline due to its aggressive promotions.

Raising 2020-22E EPS by 8-24%

We raise TM’s 2020-22E earnings forecasts by 8-24% after incorporating: (i) the strong 6M20 profits where TM benefited from IRU sales, a one-off adjustment to depreciation and a low tax rate; (ii) higher number of internet ARPUs and Unifi subscribers in view of the recent price trend; (iii) lower operating costs; (iv) a lower effective tax rate (closer to statutory rate of 24%) and (v) lower revenue from other businesses (ie. voice, ICT / BPO) due to weak economic growth.

Upgrade to BUY With a Higher TP of RM5.00

In tandem, we upgrade our DCF-derived 12-month price target to RM5.00 (from RM4.60) and upgrade TM to BUY (from Hold). While we expect TM’s 2H20 earnings to weaken from the excellent 6M20 results due to normalisation in depreciation charges and a higher effective tax rate, we like the group for its improved earnings outlook, excellent infrastructure and attractive valuation. At 20x 2021E PER, TM is trading at a discount to its 8-year average PER of 24x and looks attractive. Key risks to our BUY rating are weaker-than-expected quarterly earnings due to lower revenue / higher costs, and higher competition in the enterprise business or home broadband markets.

Source: Affin Hwang Research - 28 Aug 2020