Telekom Malaysia (TM) announced its 2Q20 results, which saw its core profits surged 10% quarter-on-quarter (q-o-q). TM’s overall revenues were largely in line with Macquarie Equities Research’s (MQ Research) expectations, although the surge in TM’s bad debt provisioning that MQ Research had anticipated did not materialise. MQ Research maintains an Outperform rating on TM as it believes that the rising demand for connectivity will support TM’s future growth.

Event

• MQ Research reiterates an Outperform recommendation on Telekom Malaysia, following the release of 2Q20 results. Core profits of RM256m (+10% q-o-q) brought 1H20 core profits to RM488m representing 100% of MQ Research’s and 59% of consensus estimates. Adding to the surprise was a dividend per share (DPS) of 6.8sen (68% of MQ Research’s FY20 est.). While overall revenues were tracking in line with expectations, the spike in bad debt provisioning that MQ Research’s had expected did not materialise leading to this beat. In addition to the good result, MQ Research believes the rising demand for connectivity and solutions in a digitalising Malaysia, will support future growth at TM. Meanwhile, valuations at 5.2x 21E adj. enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (EBITDA) and a 3% dividend yield are compelling, in MQ Research’s view.

Impact

• Sequential revenue growth, lack of provisioning and a better Webe help. Higher IRU (international cable), domestic wholesale data and higher global voice revenues (trading of minutes) helped revenues rise 1.4% q-o-q. Retail data (internet) was down q-o-q, largely on the decline in Streamyx (ADSL) subs, while fibre subs continued to rise (+4% q-o-q) as demand remains robust. Interestingly, Webe appears to have done better in the quarter (minorities back in the negative), potentially on reduced marketing activity, leading to a suppression in group tax rates as well.

• Connectivity and solutions focused. “New” CEO, Imri Mokhtar, confirmed that TM’s focus was going to be on providing connectivity for the country (mobile node fibrerisation, consumer and enterprise) and developing solutions for its enterprise and government customers. This ties in with the growing thematic of digitalising Malaysia in a post-Covid world. TM’s network reach places it in a strong position for the former, while a renewed management focus on the latter helps drive a vastly untapped revenue stream in MQ Research’s view.

• MQ Research places its estimates under review. While revenue developments are largely in line, MQ Research aims to reassess its bad debt provisioning assumptions post results.

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

• T MK: RM5.28 based on a discounted cash flow (DCF) methodology

Source: Macquarie Research - 1 Sept 2020