• Maintain BUY, with new DCF-based MYR8.45 TP from MYR8.40, 32% upside, and c.4% yield. Telekom Malaysia’s (TM) 3Q/9M24 earnings trumped our and consensus expectations on cost excellence. We see respectable 11.7% FY24F- 26F earnings CAGR, supported by healthy growth in data and internet revenues, and sustain cost discipline. TM’s ownership of core digital infrastructure assets makes it an indispensable connectivity play. A 4% ESG premium is built into our TP, with TM making steady progress towards decarbonisation.

• A beat; EBIT tracking ahead on solid cost control. 3Q24 PATAMI of MYR465.1m (+17.3% QoQ/-13.6% YoY) brings 9M24 PATAMI to MYR1.29bn (-11% YoY), at 79% of our and consensus full year forecasts. Relative to our forecast, the key variance was stronger-than-expected cost efficiencies culminating in the flat opex YTD. 9M24 headline EBIT growth of 8% is trending ahead, at 86% of the low-end of the MYR2.1-2.2bn guidance for the full year. This is notwithstanding the seasonally higher 4Q opex and capex. We lift FY24F-26F earnings by 4.4%, 2.7% and 5.1% post results call, mainly to factor in the latest opex run-rates and improvement in Unifi traction.

• Internet revenue stabilised; Unifi subs growth accelerated; wholesale revenue seeing voice dilution. Internet revenue grew a marginal 0.3% QoQ (YTD: +0.4% YoY), reversing two quarters of contraction, thanks to new UniVerse packages/campaign launched in May. This is despite the stiff fibre broadband (FBB) competition with a more than doubling in fibre subs-adds and higher APRU. Management is positive on revenue momentum going forward, noting the higher take-up from virgin customers and churns from rivals. Meanwhile, wholesale revenue grew 5% QoQ on lumpy indefeasible rights of use (IRU) sales and higher broadband access and fibre backhaul revenue.

• Optimistic on TM One; projects in delivery mode. Enterprise revenue was flat QoQ (YTD: +2% YoY), after stripping out the one-off MyTV revenue booked in 2Q24. TM is nonetheless upbeat on growth prospects with a good funnel of projects from the government and private sectors, some of which are in delivery mode. Management sees the bundling of connectivity services with solutions as mitigating the pressure on run-of-the-mill connectivity offerings. It guided that TM is on track for a 2Q26 launch of the artificial intelligence-data centre JV with Singtel (ST SP, BUY, TP: SGD3.60).

• Valuation remains undemanding; structural growth thesis intact. TM remains our preferred sector pick. We see the group delivering respectable FY24F-26F earnings CAGR of 11.7% driving ROIC expansion. The stock continues to trade at a discount to its historical 10-year EV/EBITDA mean. There is upside risk to DPS with the strong FCF generation and the under-leveraged balance sheet (FY24F net debt/EBITDA at 0.9x). Our MYR8.40 TP implies a prospective EV/EBITDA of 7x. Key risks: FBB competition, earnings/dividends shortfall and regulatory setbacks.

Source: RHB Securities Research - 27 Nov 2024