Updates

We attended Telekom Malaysia (TM)’s 4Q22 results briefing and here  are the key takeaways:

• The management has held back from providing guidance for 2023 due to uncertainties in regulatory policy (as the government finalizes the review of 5G network rollout this month), higher technology costs,  and economic headwinds which may lead to slower market growth and lower spending by customers.

• Depreciation and amortization will remain high following last year’s higher capex (+43% YoY to RM2.4b) in line with higher demand.

• Manpower optimization cost will decline after two years of manpower readjustment. 

• Following the government’s announcement of lower Mandatory  Standard on Access Pricing (MSAP), management will be renegotiating its contracts with clients and will include value-added services in order to mitigate the lower rates as TM’s contracts with access seekers were previously signed under a commercial agreement.

• We expect the recent revision of MSAP to have minor impact on TM’s earnings given its dominant position as evident in the previous revision in 2018 where lower prices were compensated by higher broadband subscription. We have recently reduced our FY23 EPS  forecast by 6.4% while raising our revenue estimate by 2.8% given the subscriber growth momentum. 

Results

• To recap, TM’s 4Q22 PATAMI doubled YoY to RM160.2m mainly due to forex gain on borrowings of RM66.6m, lower finance cost and lower taxation. This was on the back of lower revenue which dropped 5.5%  YoY to RM2.98b following as growth in Internet revenue (+5.5% to  RM1.1b) was unable to absorb the decline in Voice (-4.7% to  RM567.6m), Data (-9% to RM809.4m) and Others (-20% to  RM492.8m).

• Declined QoQ earnings – TM’s 4Q22 PATAMI of RM160.2m declined  40% QoQ mainly due to operational cost (+64% QoQ) and higher depreciation and amortization (+50% QoQ). Quarterly revenue declined 5.7% QoQ to RM2.98b as revenue from all segments decreased except for Internet.

• Record high unifi subscribers – Total broadband subscribers increased 9% YoY and 2% QoQ to 3.037m as UniFi subscribers grew  18% YoY and 3% QoQ to a record 2.962m to cushion the decline in  Streamyx subs which decreased 73% YoY and 29% QoQ to 75k. 

• Mixed ARPUs – TM’s Average Revenue Per User (ARPU) for  Streamyx broadband was higher QoQ at RM113 vs RM100 in 3Q22 while ARPU for UniFi was flat at RM132.

• Better gearing – Net debt/EBITDA was lower at 0.94x vs 1.09x in  3Q22 while free cash flow climbed to RM2.02b vs RM1.91b in 3Q22.

Earnings Outlook/Revision 

• Below expectation – 2022 PATAMI achieved 85% and 88% of our/consensus’ full year estimate while quarterly revenue met our and consensus’ expectations. 

• Key beneficiary – We are positive on the stock as TM is a key beneficiary of JENDELA and DNB given its infrastructure of fibre network and submarine cables as well demand for data centres and  5G rollout.

Valuation & Recommendation

• Maintain BUY with a target price of RM6.31 (previously RM6.55).  The fair value is based on DCF with assumption of 0.5% terminal growth and 10% discount rate.

• Risks: a) higher than expected operational costs, b) price  competition, c) regulatory risks  

Source: JF Apex Securities Research - 3 Mar 2023