Macquarie Equities Research (MQ Research) raised Telekom Malaysia’s (TM) FY21E/22E/23E core profit forecast by 1.9%/0.3%/1.9%, respectively, despite the share price underperforming the KLCI since its 4Q20 results were announced on 24 Feb. MQ Research maintained Outperform on TM while revising its target price upward to RM8.15, 42.5% higher than yesterday’s closing price of RM5.72.

Reiterate Outperform; good value at current price

• TM’s share price is down 7.4% since its 4Q20 results on 24 Feb (KLCI +2%) and represents good value. TM is a play on the government’s push for digitalisation. Healthy cash flows, with a cash pile of RM4.1bn in FY21E, and an under-leveraged balance sheet support its compelling 3% dividend yield. Meanwhile, the resumption of economic activity should support Enterprise spending and a 20-23E core-profit compound annual growth rate (CAGR) of 19%, supporting a rerating of its undemanding 6.2x adj 21E enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA). MQ Research reiterates an Outperform recommendation on TM, with a target price (TP) of RM8.15 (+2%).

Focus on growth; cabotage and content issues minor

• Growth still the focus. MQ Research maintain its view that as the Malaysian economy opens, Enterprise demand for TM’s services will pickup as companies focus on growing revenues and streamlining costs via digitalisation. Additionally, the ongoing Jendela program is accelerating demand for wholesale fibre and expanding the reach of retail fibre. The government’s own digitisation initiative adds another growth driver. MQ Research estimates TM will grow revenues at 5% p.a. in 2020-2023E, fueling a 19% core-profit CAGR during this period.
• Cabotage issue – back to the old normal for now. Discussions with industry players suggest that while the cabotage issue does create friction for the goal of making Malaysia a location of choice for future cable landings, the fact is that the industry has worked under these conditions historically (cabotage was only lifted in 2018). The industry is hopeful about the resolution of the issue, but the impact on earnings/cash flows in the medium term is negligible.
• Content not an issue. Fears around Disney pulling back content, and its impact on TM’s Unifi business, are overblown, in MQ Research’s view. MQ Research would expect TM’s UnifiTV customer base to have content preferences that are similar to those of leading pay-TV operator Astro (ASTRO MK, RM1.02, Outperform, TP: RM1.58), i.e., vernacular content. Vernacular content makes up 70% of Astro’s viewership, with viewership of foreign content being highly fragmented.

Earnings and Target Price Revision

• MQ Research raises its FY21E/22E/23E core profit by 1.9%/0.3%/1.9%, respectively. MQ Research increases its discounted cash flow (DCF) derived TP by 2% to RM8.15 as a result.

Price Catalyst

• 12-month TP: RM8.15 based on a DCF methodology

• Catalyst: Q1FY21 result to confirm growth trajectory.

Action and Recommendation

• Reiterate Outperform. MQ Research’s bull/bear valuations are RM8.97/RM5.04.

12-month Target Price Methodology

• T MK: RM8.15 based on a DCF methodology

Source: Macquarie Research - 6 May 2021