Review

• TM’s 1HFY23 core net profit of RM982mn (+33.8% YoY) beat ours and consensus full-year estimates at 75.1% and 74.9% respectively. Core net profit excludes the impairment of IT infrastructure assets (RM121.0mn) and accelerated depreciation of network assets (RM72.0mn). The positive variance was largely due to lower-than-expected taxes owing to the recognition of tax credits from the utilisation of previously unrecognised tax losses following TM’s internal reorganisation exercise. Management has guided for lower taxes in the near term with further utilisation of the previously unrecognised tax losses expected over the next 2 years.

• TM declared a 1st interim dividend of 9.5sen (1HFY22: 9.0sen).

• YoY. 1HFY23’s revenue and normalised EBITDA edged up 1.1% YoY and 2.3% YoY to RM6,050mn and RM2,486mn. The resilience was anchored by higher revenue from: i) unifi (+2.4% YoY) on additional fixed broadband subscribers and ii) TM Global (+7.2% YoY) on higher data services and data centre co-location. unifi and TM Global’s revenue growth more than offset weakness from TM One (-9.1% YoY) which was impacted by price reductions of large contracts and lower revenue from projects in delivery. TM’s higher revenue coupled with lower finance costs and recognition of tax credits from previously unrecognised tax losses lifted core net profit higher 33.8% YoY to RM982mn.

• QoQ. 2QFY23’s revenue improved 5.0% QoQ to RM3,099mn RM1,283mn. This was driven by higher revenue from TM Global (+25.3% QoQ) and TM One (+1.4% QoQ), which outweighed lower revenue from unifi (-1.9% QoQ). TM Global’s robust growth was due to higher international managed wavelength and international voice. TM One’s revenue grew on better connectivity and business solution revenue. As for unifi, despite continued expansion of its fixed broadband subscriber base, revenue softened due to lower voice and value-added services. During 2QFY23, albeit at a moderated pace, the unifi segment recorded fixed broadband subscriber net adds of 27k QoQ to a new high of 3,107k. Meanwhile, despite higher revenue, normalised EBITDA was eased marginally 0.2% QoQ to RM1,242mn mainly due to higher direct costs (including commissions, content) and operational costs (including maintenance, license, ICPT surcharge, advertising & promotion).

Outlook

• TM unveiled guidance for FY23 including for: i) revenue to be flat, ii) EBIT in the range of RM1.8bn to RM2.0bn (FY22: RM2.1bn), and CAPEX as a % of revenue from 18% to 20%. Management continues to foresee a challenging operating environment. Notwithstanding, the group continues to focus on strengthening its core business as it remains firm on the potential from fixed, mobile, and lifestyle convergence as well as enterprise/government space. In this regard, 2HFY23 is expected to see additional costs for such efforts including for advertising and promotion and network sharing.

• With regards to the Mandatory Standard on Access Pricing, following TM’s release of its Reference Access Offer, management shared that the group remains in negotiation with access seekers on the pricing of wholesale internet rates. Note that with the downward revision to regulated access pricing expected to lead to lower wholesale revenue and retail pricing, we had earlier baked in a 5% to 10% reduction to TM’s ARPU. That said, we note earlier that the group will attempt to defend average revenue per customer at the retail level via the offering of valueadded services, which we believe would include fixed broadband speed upgrades along with other converged offerings.

Impact

• We raised our FY23F/FY24F earnings estimates by 48.4%/46.9% after factoring in the impact of tax credits to reflect actual 2QFY23 results.

Valuation

• Corresponding to our earnings upgrade, our TP for TM is raised to RM6.65 (previously RM6.45) based on DCF valuation with a WACC of 8.5% and long-term growth rate of 1.0%. Our TP implies an EV/EBITDA of 6.1x, which is ~+1SD to the stock’s 5-year mean. Maintain Buy. We continue to like TM for its ambitions to fulfil key connectivity targets under JENDELA, strength to support digital transformation and 5G rollout, as well as its on-going cost optimisation agenda. Key downside risks include heightened competition and regulatory changes.

Source: TA Research - 28 Aug 2023