• Maintain BUY, higher DCF TP of MYR7.80 from MYR7.65, 66% upside and 3.4% yield. Telekom Malaysia (TM)’s 1Q22 results marked the typical revenue seasonality with sustained EBITDA YoY, thanks to good cost restrain. We continue to see the internet and wholesale segements as key growth drivers, underpinned by the expansion of its fiber footprint, 5G backhaul leasing, and broadband access deals. TM remains our preferred telco pick with a revised parity ESG score imputed in our TP.

• Broadly in line. 1Q22 core earnings (adjusted for one-offs in 4Q21) narrowed 2.7% QoQ (+2.6% YoY) as lower interest expense was offset by weaker revenue seasonality (-8.3% QoQ/+3% YoY) with a MYR105m manpower optimisation cost booked. This formed 29% of our forecast (consensus: 31%) with some normalisation of opex expected in the ensuing quarters. A results call is slated this morning. Our forecast is unchanged.

• Internet revenue at quarterly high (+2.6% QoQ), wholesale grew 2% YoY. Fiber subs-adds decelerated for the seond quarter in a row to 134k in 1Q22 (4Q21:154k/3Q21:208k) as economic sectors reopened. Consequently, ARPU narrowed 3.5% QoQ to MYR136. Meanwhile, wholesale revenue gained 2.1% YoY as higher domestic broadband access revenue offset lower international revenue. It fell 18.7% QoQ from lumpy indefeasible rights of use (IRU) sales in 4Q21.

• Enterprise (TM One) revenue fell 6% QoQ (-7.5% YoY). While TM is seeing good opportunities in enterprise digitalisation initiatives, execution delays and change in project plans are hampering the conversion of pipelines. The impact is also compouned by global supply chain issues which have impeded project deliveries. Despite being the sole domestic cloud services provider (CSP), TM has yet to see meaningful contribution from the government’s Cloud-First strategy.

• Stock is still outperforming its mobile peers. TM’s FY22F guidance is for ‘low to mid-single digit’ revenue growth and headline/reported EBIT exceeding MYR1.8bn. While the stock has retreated some 14% YTD, it has nonetheless outperformed its mobile peers, predicated on a stronger earnings outlook and the relatively more benign competition. Note that TM’s foreign shareholding level continues to trend lower (April: 9.44%) and compares with the 8.8% low post-GE-14.

• ESG and key risks. We raise our ESG score to 3.0 (from 2.9) - at parity with the country median - reflecting improvements on group disclosure standards as part of the corporate governance pillar. Key risks are competition, earnings dissapointments, and adverse regulatory developments.

Source: RHB Research - 26 May 2022