• Stay BUY, with new DCF-derived TP of MYR7.40 from MYR7.80, 31% upside and c.3% FY23F dividend yield. We see the structural growth story continuing for Telekom Malaysia, our preferred large-cap telco pick, with management executing well on its transformation programme. There is upside risk to its earlier guidance even with opex and capex picking up in 2H22. Post results call, we raise FY22F-24F core earnings and DPS, with TP lowered slightly to account for a higher cost of equity.

• Things may be finally looking up for TM One (enterprise and public sector arm). TM is confident the turnaround in TM One revenue (+7.7% QoQ/+4.1% YoY) can be sustained on the back of recurring connectivity revenue and enterprise digitalisation efforts with a good funnel of projects. It expects the newly set-up digital and cloud services outfit (Credence) to contribute in the medium term, having added 10 customers (across various industries) in a short span of time with a headcount support of 146. TM said the 39% jump in account receivables (c. MYR800m) over the past six months is mostly related to government projects undertaken at TM One for which it expects payment to be made in 2H22.

• Upside risk to guidance even with seasonally stronger 2H opex. TM’s guidance of low- to mid-single digit revenue growth and EBIT exceeding MYR1.8bn looks conservative, in our view, with 1H22 topline growth coming in at 7.3% and EBIT growth of 29.2% YTD (c.70% of the base guidance). Even with the seasonally higher opex and capex (inflationary pressures), and taking into account that the bulk of FY22F VSS cost has been booked in 1Q- 2Q22 (1H22: MYR110.5m), we see upside risk to the EBIT guidance.

• Earnings and DPS forecasts raised. We lift FY22F-24F core earnings by 5-15% after factoring in the latest opex run-rates and stronger growth for TM One, which includes Credence. Aside from internet services, we expect TM’s wholesale business to remain a key earnings driver, backed by the aggressive 5G rollout (fibre backhaul), and the robust demand for domestic wholesale access given the still modest FBB penetration in the country (1Q22: 41%). We also raise our FY22F-23F DPS to 17-18 sen (from 16 sen). Our DCF-based TP is lowered slightly after imputing a higher cost of equity from the rise in bond yields. With an ESG score that is in line with the country median (3.0) as per our proprietary methodology, we attribute a zero discount/premium to our TP

• Key risks are competition, weaker-than-expected earnings, and regulatory setbacks. TM has registered its interest to take up an equity stake in Digital Nasional Berhad (DNB), the single wholesale network access provider for 5G.

Source: RHB Research - 26 Aug 2022