Overview

Telekom Malaysia (TM) is a telecommunications service provider offering a comprehensive suite of communication services and solutions in fixed (telephony and broadband), mobility, content, WiFi, information and communications technology, cloud, and smart services.

Investment Themes

• Digital Economy. We expect TM to continue benefitting from Malaysia’s digital economy given that the private and public sectors will continue pursuing the digitalisation journey. TM can provide innovative solutions to the enterprise and government via a wide range of product & services such as network services, IT landscape migration, managed services as well as cybersecurity services. On top of that, TM also has state-of-the-art data centres and cloud infrastructures, which can ensure full data residency, locality, and sovereignty for the Malaysian government. Meanwhile, TM is also playing an important role in supporting Malaysia’s 5G rollout via leasing fibre to Digital Nasional Bhd under a service agreement worth RM2.0bn over 10 years.

• Further Upside from Unifi. In 1Q24, TM charted its 16th consecutive quarter of fixed broadband net adds as total subscribers climbed 4k QoQ to a new high of 3,135k. We believe there is still further room for growth with Malaysia’s fixed broadband penetration rate at 46.9% per 100 premises in 1Q24. The growth of the fixed broadband market will be supported by the national digital infrastructure plan (JENDELA). Under JENDELA Phase 2 (2023-2025), the target is to increase premises passed with fibre connectivity from 7.7mn to 9.0mn.

• Data Centre is a New Pathway for Growth. We believe the data centre could be a new avenue for earnings growth. TM has recently proposed to set up a joint venture (JV) with Singtel's regional data centre arm, Nxera MY Pte Ltd, to develop an advanced data centre in Johor, Malaysia. The data centre is initially designed for 64MW and could be scaled up to 200MW later. It is envisioned to be a cloudenabled Tier 3 facility and it is expected to be operational in 2026. We like this proposed JV as it will have a strong competitive edge in terms of connectivity network and connectivity costs, which shall help to capture the rising demand and opportunities from the next generation of AI application providers and multinational companies.

Risk

• Downside risks include heightened competition and unfavourable regulatory changes.

Recommendation

• We value TM at a TP of RM7.70/share based on DCF valuation with a WACC of 8.5% and a long-term growth rate of 2.0%.

Source: TA Research - 2 Jul 2024