TM’s 1HFY23 results beat expectations on higher-than-expected tax credit utilised. Operationally, its performance was stable as reflected in a 2% rise in its 1HFY23 EBITDA and positive subscriber growth. We raise our FY23-24F net profit by 43% and 32%, respectively, but maintain our TP of RM6.23 and OUTPERFORM call.

Its 1HFY23 beat expectations at 78% and 69% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came largely from higher-than-expected tax credit utilised. It declared a DPS of 9.5 sen, on track to meet our full-year forecast of 21.0 sen.

Results highlight. YoY, its 1H23 revenue inched up 1% as a 5% growth in internet top line, was offset by contraction in voice (-2%) and data (- 3%). While its EBITDA grew in line with top line at 2%, its EBIT fell 12% on higher depreciation and amortisation, as well as impairments. However, its net profit surged 25% thanks to utilisation of tax credit.

QoQ, its 2QFY23 revenue rose 9% driven by TM Global (+25% on higher internal voice and domestic data). Its net profit surged 72% on lower depreciation charges, absence of headcount right-sizing cost and utilisation of tax credit.

In terms of operating statistics, its Unifi subscribers inched up 1% with home and SME segments growing 2% and 3%, respectively. Its average revenue per customer (ARPC) remained stable YoY at RM251. Its home broadband subscriber growth remained solid at 11% YoY and 1% QoQ. While blended ARPU saw a slight dip YoY and QoQ, to RM130.

The key takeaways from TM’s analyst briefing are as follows:

1. TM guided for flat revenue growth in FY23. It maintains its view that 2023 will be a challenging year due to changes in the regulatory landscape, heightened competition and other market dynamic uncertainties. As mitigation, (i) it will continue to increase fixed broadband subscriber base, while (ii) TM Global pursues opportunities to capture demand in both domestic and international segments.

2. It also guided for an EBIT of RM1.8b-RM2.0b and reiterated its capex guidance of 18%-20% of revenue. Its EBIT will soften in 2HFY23 due to costs incurred for headcount right-sizing and the ramping of its mobile business since 1HFY23.

3. It had an unutilized tax credit on RM2b income at the start of FY23. Having utilised part of this in 1HFY23, it will utilise bulk of it in 2HFY23. Meanwhile, for FY24, it plans to utilize capital allowances it is entitled to on a RM2b capex.

4. Its cash balance stands at RM2.17b which will be used to fund big ticket items and the second 5G network. We make no changes to our forecast DPS of 21.0 sen in-line with TM’s policy to give out higher dividends.

5. It guided for minimal 5G access payment as it is billed in accordance with the gradual increase in coverage.

Forecasts. We raise our FY23F and FY24F net profit by 43% and 32%, respectively, to reflect the utilisation of tax credit and capital allowances.

However, we keep our TP of RM6.23 as the positive impact from the tax credit and capital allowances is offset by the change in our assumption of capex as a percentage of revenue to 19%-20% (from 18%) which is still within TM’s guidance for 18%-20% as mentioned. Our valuation basis is unchanged at 5.5x FY24F EV/EBITDA, at 50% discount to the forward EV/EBITDA of pure-play broadband peer TIMECOM of 11x to reflect TM’s inherently higher regulatory risk. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like TM on account of: (i) positive tailwinds on the digital space as economies recover, (ii) the enhanced network coverage nationwide boosting internet demand from both the public and business sector, (iii) competitive offerings with added 5G availability, and (iv) subscribers base expected to improve further given the expected lower broadband prices coming from the revised MSAP. Maintain OUTPERFORM.

Risks to our call include: (i) weaker-than-expected data and internet revenue, (ii) stronger-than-expected OPEX, and (iii) irrational competition among players.

Source: Kenanga Research - 28 Aug 2023