KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings expanded marginally to RM288.9m, supported by healthier profit margin
• 9MFY20 normalised earnings contracted by only -1.7%yoy to RM797.3m, which came in better than our expectation
• The group’s ability to growth its revenue remains concern as the revenue has been on a downtrend since 2018
• However, effective cost management programme has led to better profitability and healthier cash reserve
• Upgrade to NEUTRAL with a revised TP of RM4.93

Continuous recovery in revenue. Telekom Malaysia Bhd’s (TM) 3QFY20 normalised earnings increased marginally by +0.4%yoy to RM288.9m. This was mainly attributable to the lower operating cost incurred which lifted the profit margin to +10.7% (+0.7ppts). This was despite a -5.7%yoy contraction in revenue to RM2,689.9m. Lower revenue contribution was seen across all the revenue segments with the exception of the wholesale business.

Above expectation. Cumulatively, 9MFY20 normalised earnings amounted to RM797.3m which represented a decline of -1.7%yoy. This came in above ours and consensus expectations, accounting for 85.2% and 87.4% of full year FY20 earnings estimates respectively.

Opex/revenue ratio remains elevated. TM’s 9MFY20 total cost came in at RM6,717m, a decline of -7.8%yoy. Note that the percentage of total cost to revenue remained had subsided slightly to 85.7% from 86.7% for 9MFY19. The group had managed to reduced cost from across all its cost drivers namely direct cost (-9.8%yoy), manpower (- 7.8%yoy), other opex (-4.5%yoy) as well as depreciation and amortization (-7.5%yoy).

Broadband. The total broadband customer as at 3Q20 expanded to 2,264k customers, an increase of +4.9%yoy. This was mainly due to the growth in unifi subscriber to 1,648k customers (+20.0%yoy). However, the Streamyx customer declined further to 616k customers (-21.6%yoy). Meanwhile, Streamyx and unifi ARPU continue to slide to RM92/mth and RM148/mth from RM111/mth and RM167/mth respectively.

Capital expenditure (Capex). TM’s 3QFY20 capex surged by +39.8%yoy to RM400m which was mainly due to higher spending across expenditure namely access (+8.7%yoy), core network (+102.9%yoy) and support system (+92.6%oyoy) to RM220m, RM69m and RM131m respectively. This led to 9MFY20 cumulative capex of RM879m (+19.4%yoy). Nonetheless, this was lower than what the management has guided initially due to the advent of the Covid-19 pandemic.

Impact on earnings. We are revising upwards FY20-22 earnings estimates to between RM996.9m and RM1,109.7m. This is premised on assumption of healthier operating profit margin in view of effective cost control as well as lowering the effective tax.

Dividend. The ongoing cost control measure for both opex and capex has led to better cash position. As at 3QFY20, the cash reserve has improved to RM4,890.4m, an increase of +32.6%yoy or RM1,201.3m. As such, we view that the group is in a better position to increase its dividend payout rate towards the upper end of its dividend policy. Premised on this, we are inputting higher dividend for FY20 to FY22 to between 13.2sen and 16.1sen.

Target Price. We are revising our target price to RM4.93 (previously RM3.15). This is premised on Dividend Discount Model valuation methodology with an unchanged WACC of 8.3%.

Upgrade to NEUTRAL. We commend the group’s cost rationalization programme which has significantly improves the group’s profitability as well as the cash position. We view that this programme will continue to keep the cost depressed in there foreseeable term. However, our main concern lies with the group ability to grow its revenue. Except for the wholesale segment, all the other revenue segments have underperformed. Its main revenue segment i.e. Unifi has experienced a decline in ARPU. We view that it could be due to higher mix of lower end broadband packages as well as rebase of their broadband packages. Moving forward, we expect the ARPU to stabilise at current level, at the very least. On a positive note, the Unifi customer base continues to grow steadily. Should the growth momentum continues, it could partially made up for the decline in ARPU. Given the group’s healthier cash reserve, we view that TM would have the ability to provide better dividend payout. Premised on this, we expect dividend yield to come in above three percent in the coming years. All factors considered, we are upgrading our recommendation for TM to NEUTRAL from sell previously. Further key rerating catalyst would be stronger-than-expected growth in revenue.

Source: MIDF Research - 26 Nov 2020