• Strong 3Q20 core net profit of RM289m, driven by robust revenue and cost savings from business optimisation initiatives. Overall, the results were above the market and our expectations.
• TM continued to gain internet subscribers in 3Q20 (+1.7% qoq) as the growth in Unifi subs outpaced the decline in Streamyx subs.
• We lift our 2020-22E EPS forecasts by 16-31% and raise TM’s price target to RM6.20. Maintain BUY; we continue to like TM for its excellent fibre infrastructure, positive earnings outlook and attractive valuation.

3Q20 core net profit of RM289m was TM’s second highest in the past 5 years

TM reported a good set of results: 3Q20 core net profit grew by 8.0% qoq to RM288.9m on higher revenue (+3.8% qoq to RM2.69bn), driven by higher turnovers from all products. In particular, the voice revenue grew by 10.8% qoq to RM634m due to by higher utilisation of traffic minutes during this covid-19 pandemic / movement control period. Elsewhere, TM recognised RM49.9m forex gains on borrowings, which lifted its 3Q20 headline net profit to RM329.5m (+19.9% qoq).

9M20 core net profit beats consensus and our expectations

Notwithstanding a 6.7% yoy decline in revenue, TM’s 9M20 core net profit fell by a mere 1.7% yoy to RM797.3m due to lower operating costs (-6.4% yoy), decline in depreciation and amortisation expenses, and lower effective tax rate of 19.9% (due to deferred tax adjustment in 1Q20). The group’s proactive business optimisation initiatives continued to deliver cost savings and helped cushion the revenue decline during 9M20. Overall, the results were above market and our expectations – TM’s 9M20 core net profit accounted for 87% of street and 93% of our prior full-year earnings forecasts. The earnings beat was due to better-than-expected internet and voice revenue and low operating and depreciation costs.

TM continues to gain internet subscribers

TM’s 3Q20 internet revenue grew by 1.8% qoq to RM938m (-2.7% yoy), attributable to an increase in total internet subscribers (2.26m in 3Q20, +1.7% qoq / +4.9% yoy). The increase in Unifi subs (+97k qoq / +275k yoy) continued to outpace the decline in Streamyx subs (-60k qoq / -170k yoy) due to strong demand for fixed broadband from new subscribers during this Covid-19 pandemic / movement control period. After a major repricing in 2H2019, the Unifi and Streamyx’s ARPUs have somewhat stabilised in the recent quarters. We expect this trend to continue into 2021.

Management upgraded 2020 earnings guidance but cut capex target

Management has lowered its 2020 capex guidance to 12-15% of revenue (from lowto-mid 20%) due to the slow expansion / upgrading progress in 9M20 attributable to disruptions from the movement control order. Elsewhere, TM has upgraded its 2020 EBIT guidance to RM1.3-1.5bn (from “more than RM1.0bn”). TM’s EBIT guidance looks very conservative, considering its solid 9M20 EBIT of RM1.24bn. Nonetheless, we observe that TM has consistently outperformed its earnings guidance in the past few quarters. We view the revised guidance as conservative.

Raising 2020-22E core earnings forecasts by 16-31%

We raise TM’s 2020-22E earnings forecasts by 16-31% after incorporating: (i) the strong 9M20 profits and higher voice revenue for 2020E (expect the voice momentum to taper in 2021); (ii) higher revenue from internet segment assuming stronger growth in Unifi subscribers and slower decline in Unifi ARPU. Management does not see material regulatory or competitive pressures on the Unifi prices but expects a slow, natural decline due to dilution from new subscribers with lower affordability; (iii) lower operating costs – management continues to see room for further optimisations; and (iv) lower depreciation expenses due to the 2020E capex revision.

Maintain BUY with a higher price target of RM6.20

In tandem with our earnings upgrade, we increase our DCF-derived 12-month price target to RM6.20 (from RM5.00). Maintain BUY. We continue to like TM for its positive earnings outlook driven by robust demand for fixed broadband and ongoing cost optimisation initiatives, its excellent fibre infrastructure and attractive valuation. At 18x 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 - 26 Nov 2020