The shares of Telekom Malaysia (TM) closed 23.8% higher year-to-date at RM6.70 yesterday, leading up to the expected release of its fourth quarter (4Q20) results towards the end of this month. Macquarie Equities Research (MQ Research) raised its target price for TM, its top pick within the Malaysian telco sector, with a view that 4Q20 results will provide evidence of improved profitability.

Key Points

• Efficiency programs are providing better cost controls than expected.
• TM is a beneficiary of structural themes of digitalisation, connectivity and 5G.
• FY20/21/22/23E core profit up 8.6/13.4/16.2/14.0%; target price (TP) +41% to RM8.02.

Event

• MQ Research reiterates its Outperform recommendation on Telekom Malaysia with an increased discounted cash flow (DCF) derived price target of RM8.02 on increased forecasts, a roll-forward of MQ Research’s basis period and changes to its weighted average cost of capital (WACC) and long term (LT) growth assumptions. Discussions with management point to no slowing down in efficiency gains at TM, leading to upgrades in MQ Research’s estimates. A more measured approach to wireless services is also helping. The ongoing Jendela program and increased digitalisation of the Malaysian economy, meanwhile, open up new markets for TM and should, in MQ Research’s view, drive overall growth. As a result of these, MQ Research now expects TM to deliver an 18% 2020-2023E earnings per share (EPS) compounded annual growth rate (CAGR), support upward momentum to valuations which, at 6.9x 21E adj enterprise value (EV) to earnings before interest, tax, depreciation and amortization (EBITDA), remain below levels (8-9x) seen before May 2018 when the move to “double the speed at half the price” slashed profits in 2018/19. Healthy cashflows and an underleveraged balance sheet also provide room for higher future dividends.

Impact

• Cost controls to stay. MQ Research’s recent discussions with management reveal that, contrary to its previous expectations, cost controls at TM continue to hold and, if anything, management are working towards achieving higher margins, even from the elevated 37% of 9M20. Additionally, a more focused wireless strategy has reduced losses at Unifi mobile significantly (MI -66% in 9M20).
• Growth and thematics to drive multiples. By MQ Research’s estimates, TM’s core profits will exceed its 2015 peak in 2020 and post an 18% core profit CAGR between 2020-2023E. This superior growth, MQ Research believes, should allow its shares to retest the 8x EV/EBITDA multiples it traded on between 2015-2017. Aiding this multiple expansion will be the thematics of digitalisation and cloud which should fuel demand for connectivity (consumer, wholesale and enterprise) and TM’s nascent data centre business.

Earnings and Target Price Revision

• MQ Research raise its profit estimates in FY20/21/22/23 8.6%/13.4%/16.1%/14.0%, on improved margin assumptions. DCF-derived TP +41% to RM8.02 on higher estimates, roll-forward and WACC changes.

Price Catalyst

• 12-month price target: RM8.02 based on a DCF methodology.
• Catalyst: 4Q20 results due end Feb to provide evidence of improved profitability.

Action and Recommendation

• Outperform reiterated. TM is MQ Research’s top pick within the Malaysian telco sector.

12-month Target Price Methodology

• T MK: RM8.02 based on a DCF methodology

Source: Macquarie Research - 10 Feb 2021