KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised earnings improved to RM267.7m, supported by lower depreciation and amortisation expenses

• 1HFY20 normalised earnings contracted by -2.8%yoy to RM508.4m, in-line with our expectation.

• unifi and Streamyx ARPU continue to contract, impacted by downward price adjustment exercise

• 1HFY20 capex spending went up slightly by +6.4%yoy to RM479m, which translate into 9.3% of revenue

• Maintain SELL with an unchanged TP of RM3.15

Recovery in quarterly earnings. Telekom Malaysia Bhd’s (TM) 2QFY20 normalised earnings increased by +18.0%yoy to RM267.7m. This was mainly attributable to lower depreciation and amortization expenses amounting to RM535.6m (-23.3%yoy). Note that revenue continue to trend downwards as at 2QFY20 to RM2,592.0m (-6.4%yoy).

Within expectation. Cumulatively, 1HFY20 normalised earnings amounted to RM508.4m which represents a decline of -2.8%yoy. This came in within ours but above consensus expectations, accounting for 54.3% and 61.1% of full year FY20 earnings estimates respectively.

Opex/revenue ratio remains elevated. TM’s 1HFY20 total came in at RM4,437m, a decline of -10.3%. However, the percentage of total cost to revenue remained elevated at 86.2% (vs 1HF19: 86.8%). This mainly stemmed from higher proportion of manpower and other opex of 22.9% (vs 1HFY19: 22.6%) and 15.8% (vs 1HFY10: 15.2%) respectively.

Broadband. The total broadband customer as at 2Q20 expanded to 2,227k customers, an increase of +3.0%yoy. This was mainly due to the growth in unifi subscriber. However, the Streamyx customer declined further to 676k customers (-17.9%yoy). Meanwhile, Streamyx and unifi ARPU continue to slide to RM90/mth and RM150/mth from RM113/mth and RM169/mth respectively.

Capital expenditure (Capex). TM’s 2QFY20 capex reduced by -27.4%yoy to RM217m. This was mainly lower capital spending on access at RM102m (-28.6%yoy) in view of the MCO. As such, capital spending on access should increase in the coming quarters. Cumulative 1HYF20 capex expanded by +6.4%yoy to RM479m. This translates into higher capex to revenue ratio of 9.3%. (vs 1HFY19: 8.1%).

Dividend. The group also announced first interim dividend of 6.8sen which is within our expectation.

Target Price. We are maintaining our target price of RM3.15. This is premised on Dividend Discount Model valuation methodology with an unchanged WACC of 8.3%

Source: MIDF Research - 28 Aug 2020