• BUY, DCF-based TP drops to MYR6 from MYR6.20, 19% upside with c.4% FY23F yield. Telekom Malaysia’s 1H23 results were positively skewed by tax credits (non-cash). Growth was led by the wholesale segment, with a deceleration in internet revenue while opex scaled higher. Our outlook remains upbeat, due to structural drivers – with wholesale growth expected to offset the pressure on the retail front. There is upside risk to DPS with the higher reported PAT. TM remains our preferred exposure to the sector, with the lifting of the access price overhang a key share price catalyst.

• Tax credit boost. 1HFY23 revenue and EBITDA was up 1.1% and 1.7% YTD while core EBIT narrowed 6.3%. The key deviation was the significant tax losses (non-cash) booked in 2Q23 for TM Technology Services (previously webe digital), the new operating subsidiary. This fuelled the 72% QoQ and 25% YTD rise in PATAMI. Excluding the tax losses, 1H23 core earnings were largely in line, at 50% of our forecast (consensus: 54%). A 9.5 sen interim DPS was declared (2Q22: 9 sen) (40% payout) – the highest payout since FY18. We see scope for a higher final DPS, as TM’s dividend payout (40-60%) is tagged to its headline/reported PATAMI, which would be skewed by the significant tax savings (magnitude not guided but likely staggered over two years).

• Wholesale revenue spearheaded growth and partially offset weaker internet and enterprise revenues. Wholesale growth of 25% QoQ was driven by stronger indefeasible rights of use sales. Meanwhile, uniFi revenue narrowed 2% QoQ on lower subscriber (subs) net-adds of 38k (- 38% QoQ) and ARPU (-2% QoQ). TM One (enterprise) struggled, as expected, down 9.1% with the re-pricing of large contracts from the public sector – but turnover rose QoQ on higher business solutions revenue.

• Opex broadly higher YoY, QoQ and YTD; margin to come under pressure from lower access prices. Core EBIT (adjusted for FX, accelerated depreciation, VSS and impairments) narrowed 10% YoY in 2Q23 and -6.3% YTD to MYR1.1bn from higher direct costs and marketing expenses. TM’s reinstated its EBIT guidance of MYR1.8-MYR2bn for FY23 (FY22: MYR2.1bn) – implying a weaker 2H23 EBIT on seasonally higher opex and capex, higher voluntary separation scheme cost (1H23: MYR18.5m), and some margin pressure from lower access prices.

• Forecast adjustments. TM said discussions on wholesale access are expected to be wrapped up soon. We had previously incorporated a 5-10% impact on retail uniFi ARPU from lower access prices, pending further clarity. Overall, we lift FY23-24F core earnings by 24-28%, to factor in the tax losses (no specific guidance) and raise DPS estimates for the respective years.

Source: RHB Securities Research - 28 Aug 2023