• Keep BUY and MYR6.20 DCF-derived TP, 24% upside, c.4% yield. Telekom Malaysia has inked a new 4G multi-operator core network (MOCN) deal, which would close its mobile coverage gap with industry peers. We see upside risk to our/consensus’ FY23F earnings and DPS, with TM likely to book significant tax credits pursuant to its internal reorganisation in March. TM remains our preferred sector pick. Our valuation has incorporated a parity ESG score based on our internal methodology.

• New 4G MOCN deal. TM announced that it has awarded the 4G MOCN and 2G/4G domestic roaming (DR) services to Maxis (MAXIS MK, NEUTRAL, TP: MYR4.03). The agreement – valid for three years – will see its 4G (uniFi Mobile) population coverage expand to >95% from >80% currently (own sites), with Maxis providing access to 6,800 4G sites and 10,000 2G sites. While no value was disclosed for the wholesale contract, TM said it is based on usage (not subscribers), rates, and other agreed parameters. The new MOCN/DR deal will replace the 2G/3G/4G MOCN/DR wholesale agreement inked with CelcomDigi (CDB MK, NEUTRAL, TP: MYR4.60) in Feb 2019. The new MOCN deal will allow TM to save on capex and close the gap on 4G coverage with its bigger peers.

• Growth in retail and global/wholesale will offset weaker TM One/enterprise showing. We continue to see robust internet/uniFi and wholesale (domestic and international) growth offsetting weaker/muted growth at TM One, with the latter hit by lower value of public sector contracts upon renewal (ie MyGov*Net) and various execution delays. TM is in discussions with hyperscalers and/or strategic investors for the expansion of its data centres (DC), which would see upfront/pre-sold DC inventories.

• Tax credits to be booked. We gather from a recent meeting that TM will recognise significant tax credits/losses in FY23F following its internal reorganisation exercise, which saw its key operating units transferred to TM Technology Services (previously Webe Digital). This would result in a boost (non-cash) to the group’s reported PATAMI and consequently higher DPS payout (TM’s dividend payout is based on 40-60% of reported PATAMI). There is upside risk to our forecast, with management expecting FY23F earnings to be on par/better than FY22, notwithstanding the impact of the new mandatory standard on access pricing (MSAP), supported by extended cost efficiencies. TM should see over MYR100m in opex and rental cost savings from the shift of its corporate headquarters from Menara TM to TM Campus in Cyberjaya and internal cost efforts.

• Key risks: Competition, weaker-than-expected earnings, and regulatory setbacks.

Source: RHB Research - 26 Jun 2023