• D/G to NEUTRAL from Buy, new MYR5.90 TP (DCF) from MYR6, 7% upside, c.4% yield. FY23 results were below our expectations on stronger-than- expected earnings dilution from the deconsolidation of the data centre (DC) business and higher opex. The fibre broadband (FBB)/retail business continues to see respectable growth on network expansion with a decline witnessed in other solutions revenue. We see headwinds from the renewed FBB competition in the market while the expansion of Time dot Com’s fibre footprint could see depreciation being elevated.

• Falling short of our estimates. 4Q23 adjusted PATAMI of MYR99.4m took full-year core PATAMI to MYR415.6m (-3%) at 91% of our full-year estimate (Street: 96%). Relative to our forecast, the deviation was on stronger-than- expected earnings dilution from the DC business (AIMS) deconsolidation (now a 30% associate). Prior year numbers are not comparable, with the DC numbers classified as dis-continuing operations. A final interim (8.25 sen) and special interim DPS (6.9 sen) puts full-year DPS at 85.8 sen (including the special DPS of 54.5 sen paid earlier from proceeds of the DC sale), representing c.67% of FY23 adjusted PATAMI.

• Growth continues to be led by FBB/retail (4Q23: +19%), followed by enterprise (+17%) and wholesale (+6%). Cloud and other solutions topline (12% of group revenue) saw an 11% drop in FY23 (4Q23: -12%), as the growth in cloud services (+21%) were more than offset by weaker other solutions revenue (-36%) on the novation of DC contracts to AIMS – the latter contributed an 8-month contribution of c.MYR5m to the associate line.

• Seeing cost pressures with network expansion and as competition steepens. Customer acquisition cost continues to creep up and were 17% higher YoY in 4Q23 (FY23: +8%), likely on renewed market aggression post the new access agreements inked in 4Q23 (which led to the re-pricing of FBB packages). Note: TDC’s FBB appeal lies in its stability and superior throughputs (thanks to end-to-end control over its 100% fibre network) – a competitive advantage in multi-dwelling units or MDUs where there is still room to grow (addressable market of c.3m vs TDC’s fibre premises pass of 1.55 at end 4Q23). While management has articulated plans to ramp-up fibre premises coverage beyond the typical 0.2-0.3m additions pa, procuring timely site approvals/permits appears to be a recurring challenge.

• Forecasts tempered. We cut FY24F-25F core earnings by 8-10% after adjusting our revenue assumptions and some housekeeping to our DC numbers. The stock’s risk-reward appears balanced with FY24F EV/EBITDA valuation at 11.8x. Key risks: FBB competition, weaker-than-expected earnings, and regulatory setbacks. Our TP includes a 0% ESG premium. TDC has yet to publish emission figures based on established protocols.

Source: RHB Research - 1 Mar 2024