• Reiterate BUY and TP of MYR6.20, 22% upside with a 3.5% yield. Telekom Malaysia’s 1Q23 results were in line with sustained growth from the internet/UniFi and wholesale segments. We see clarity on the impact of new access prices fuelling a share price re-rating with the group benefitting from structural demand drivers. TM remains our preferred sector pick with a parity ESG score (0% premium) bolted on to our TP. Key risks are competition, weaker than expected earnings, and regulatory setbacks.

• More accelerated depreciation. 1Q23 core earnings of MYR330.1m (+106% QoQ, -3% YoY) made up 23% of our forecast (consensus: 24%). Overall results reflect a trend growth for internet and wholesale lines, partially offset by weaker enterprise revenue. Following the accelerated depreciation and impairment charges taken on its network assets in 4Q22, TM booked a further MYR163m in 1Q23 covering the remaining network elements. We see the on-going cost controls and operational savings from the TM’s re-organisation (effective March) providing some buffer against inflationary cost pressures (utility). Our forecasts are retained for now.

• Internet and wholesale leading the pack. Internet revenue expanded 6% YoY (+3% QoQ), supported by the expanded fibre footprint under JENDELA despite the keen competition from access seekers (mobile operators ramping up bundling campaigns). Nonetheless, subs addition continues to moderate and are back to pre-pandemic levels (1Q23: +61k). Wholesale (TM Global) revenue grew 4% YoY with growth in domestic high speed broadband access and backhaul revenues (+20.4% YoY) offsetting the decline in international revenue (-13% YoY). Management expects the latter to stage a strong recovery in 2Q23 from lumpy indefeasible rights of use (IRU) deals. On the Mandatory Standard on Access Pricing (MSAP), TM said discussions with the Government/regulator on new access prices should conclude soon with the issuance of a revised reference access offer (RAO) document. We see the impact as manageable but have imputed a 5- 10% decline in retail ARPU for FY23-FY24F to be conservative.

• TM One still the dim spot. Enterprise revenue has trended lower YoY/QoQ for the second quarter in a row. TM’s enterprise segment was affected by the >20% reduction in the value of the MyGov*Net 2.0 contract (renewed for another 10 years in Jan 2023). The impact to earnings is likely to be offset by lower cost to deliver the project, in our view, with a reduction in the utilisation scope. With the impairment taken on non-performing data centres, TM One’s EBIT fell to MYR57.6m in 1Q23 (1Q22: MYR178.5m).

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 26 May 2023