• Maintain BUY, DCF-derived TP of MYR7.80, 57% upside and 3.2% dividend yield. Telekom Malaysia (TM)’s 1Q22 results call yesterday reaffirmed the strong execution narrative under its Transformation Programme. This should see the group achieve another earnings milestone in FY22F. TM remains our preferred telco sector pick. Our TP has factored in parity ESG score, in line with the country median. Key risks are competition, earnings setback, and adverse regulatory developments.

• Manpower optimisation to continue into FY24F. TM has achieved 80% of the initial target set under the manpower optimisation programme for FY22F for which MYR105m was booked in 1Q22 (under staff cost). It has thus far spent MYR247m in voluntary separation scheme (VSS) cost, staggered from 1Q21-1Q22. While the group does not share specific details, we gather TM has managed to shave c.1k headcount over the past 12 months (via VSS and natural attrition) with no replacement for non-critical positions. We are positive on the group’s plans to streamline its headcount as staff cost makes up a significant proportion of overall opex, at 33% in FY21 (FY20: 34%).

• TM One impacted by the pandemic and supply chain issues. Management attributed the weak underlying performance of its enterprise and public sector arm (1Q22: -7.5% YoY/-5.9% QoQ) to: i) The delayed economic recovery and changes in customer project plans, and ii) global supply chain issues which have thwarted project delivery timelines with delays in equipment procurement. We understand the lack of customer readiness has also hampered TM’s ability to convert pipeline projects. With the recent signing of the cloud facility agreement by the Government with the four cloud service providers (CSP), it is optimistic of securing certain parcels of the public sector cloud project to be farmed out over the next few months.

• Gestation period for new digital unit. TM’s newly set-up digital arm (Credence) was given the mandate to explore new digital B2B opportunities via partnerships, JVs, or M&As via an asset-light model. While it would leverage on TM’s existing capabilities (via TM One), Credence has a budget that is distinct from the group. It would initially focus on enhancing its human capital via investments in technical capabilities, competencies. and skillsets. We see Credence potentially embarking on acquihires, similarly to what Maxis did to strengthen its enterprise capabilities. Given the hive of ICT-related M&A deals involving telcos over the past 12-18 months, Credence may require some time to identify suitable assets. Some of the more significant M&As in recent times by telcos include StarHub (STH SP, NEUTRAL, TP: SGD1.29)’s purchase of Hong Kong Broadband (HKBN) ICT assets in Malaysia (JOS) and that of Strateq, M1’s acquisition of Malaysian-based digital services provider Glocomp Systems, and Maxis (MAXIS MK, NEUTRAL, TP: MYR3.98)’s purchase of managed services outfit, MyKris Asia.

Source: RHB Research - 27 May 2022