Telekom Malaysia’s (TM) recent 2Q21 results were in-line with Macquarie Equities Research’s (MQ Research) forecast with its core profit growing by 17% year-on-year (YoY) to RM573mn, 47%/50% of MQ Research/Bloomberg consensus estimates. Encouraged by the company’s long-term growth trajectory and positive progress, MQ Research expects a stronger 2H21 performance. TM remains top pick among the Malaysian telco operators with an Outperform rating.

Another Record Quarter for Unifi

• MQ Research maintains its Outperform recommendation on TM, its top pick among the Malaysian telco operators, following its 2Q21 result. Core profit of RM573mn for 1H21 (+17% YoY) came in at 47%/50% of MQ Research’s/Bloomberg consensus estimates. Results were in line, and MQ Research expects a stronger 2H21 performance. Another record quarter of Unifi net adds surpassing the 2mn subscriber target was seen this quarter. While there was margin contraction quarter-on-quarter (QoQ) due to a one-off opex increase from staff benefits (bonus and voluntary separation scheme, VSS), MQ Research is encouraged by TM’s long-term growth trajectory and expects stronger performance in 2H21 from higher corporate and public services digital spending. MQ Research estimates 20-23E core profit compound annual growth rate (CAGR) of 20% on the back of these trends, driving a rerating of its shares which trade at an undemanding 6x adj. 21E enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA).

The good, the “bad” and what’s interesting

• The good. Unifi posted another record 188k net adds in 2Q21 bringing its total Unifi subscribers to 2.14mn (surpassing 2mn threshold) mitigating lower average revenue per user (ARPU) given the expanded network towards non-urban areas. MQ Research believes management is confident of continuing its Unifi segment trajectory as they continue to support the govt’s Jendela initiative. Although both TM One (enterprise) and TM Global registered 4% QoQ decline, partially from higher indefeasible rights of use (IRU) sales in 1Q21 combined with strict lockdown this quarter delaying project completion, MQ Research were encouraged by positive progress shared by management regarding its involvement in the hybrid cloud program with the government and other industry verticals.

• The “bad”. Although 1H21 has been strong with +8% YoY revenue growth and RM965mn earnings before interest and taxes (EBIT), no upward revision was announced and targets were maintained (TM’s FY21E targets maintained: low single digit revenue growth, >RM1.6bn EBIT and capex-to-revenue ratio of 14-18%). MQ Research estimated revenue growth of 4% YoY and RM2bn EBIT FY21E.

• What’s interesting. As TM pivots its operations towards a more performance driven culture, linking bonus performance to the company’s EBIT, management guided more VSS provisions are expected in the next few quarters. This however, should drive long-term cost savings as the company focuses on making the company leaner and more efficient.

Action and Recommendation

• Maintain Outperform.

12-month Target Price Methodology

• T MK: RM8.15 based on a total shareholder return methodology

Source: Macquarie Research - 30 Aug 2021