Review

• TM’s 9MFY23 core net profit of RM1,487mn (+52.8% YoY) came within ours but above consensus full-year estimates at 76.7% and 99.4% respectively. Core net profit excludes the impairment of IT infrastructure assets (RM121.0mn) and accelerated depreciation of network assets (RM77.0mn). Generally, core net profit was lifted by lower net finance cost and the recognition of tax credits from previously unrecognised tax losses.

• The variance with consensus expectations is possibly due to the varying treatment of the tax credits recognised from previously unrecognised tax losses. To recap, management had earlier guided for lower taxes in the near term with further utilisation of the previously unrecognised tax losses expected over the next 2 years.

• YoY. 9MFY23’s revenue eased 0.1% YoY to RM9,126mn. The marginal decline was attributed to TM One (-13.1% YoY) which faced price reduction from large contracts and deferred customer projects. However, the weakness was largely offset by growth from: i) unifi (+1.8% YoY), driven by fixed broadband subscriber additions, and ii) TM Global, on higher domestic and international data. Despite flattish revenue, lower net finance cost and the recognition of tax credits lifted core earnings higher 52.8% YoY to RM1,487mn.

• QoQ. 3QFY23’s revenue eased 0.7% QoQ to RM3,079mn mainly due to lower contributions from: i) TM One (-2.7% QoQ) on price reduction from large contracts and deferred customer projects, and ii) TM Global (- 0.6% QoQ) on lower voice and management wavelength. Only unifi (+0.1% QoQ) reported growth alongside moderated fixed broadband subscriber additions to reach a new high of 3,117k (+10k QoQ). Management attributed the slowdown in fixed broadband subscriber net adds to regulatory headwinds which held back the launch of TM’s revised fibre broadband plans. Despite flattish revenue, higher cost from one-off manpower optimisation initiative and lower tax credits led core earnings lower 7.8% QoQ to RM505mn.

Outlook

• TM has maintained 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%.

• 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. Of note, 4QFY23 would also provide insights into the reception to unifi’s recently revised fibre broadband plans.

Impact

• We maintain our earnings estimates.

Valuation

• In all, we maintain our Buy recommendation on TM with an unchanged TP of RM6.65 based on DCF valuation with a WACC of 8.5% and longterm growth rate of 1.0%. Our TP implies an EV/EBITDA of 6.1x which is ~+1SD to the stock’s 5-year mean. 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 - 24 Nov 2023