Telekom Malaysia - Buoyed by Tax Credits

Date: 
2024-02-26
Firm: 
KENANGA
Stock: 
Price Target: 
7.22
Price Call: 
BUY
Last Price: 
6.05
Upside/Downside: 
+1.17 (19.34%)

TM’s FY23 results beat expectations. Its FY23 core net profit surged 59% driven largely by reduced interest cost, chunky tax credits and the absence of Cukai Makmur. It also beat its earlier FY23 revenue and EBIT guidance. We raise our FY24F net profit by 10%, lift our TP by 7% to RM7.22 (from RM6.76) and maintain our OUTPERFORM call.

Trumped expectations. Its FY23 core net profit of RM2.0b exceeded our forecast by 6% and the consensus estimate by 16%. The variance versus our forecast was mainly attributed to higher-than-expected recognition of tax credits from unutilised tax losses.

In-line with our expectations, TM declared 4QFY23 DPS of 15.5 sen which brought cumulative FY23 DPS to 25.0 sen (FY22: 16.5 sen). FY23 core net profit excludes: (i) FX charges (RM36m), (ii) reversal of 5G device provisions (RM31m), and (iii) asset impairments (RM152m).

Yoy, its FY23 topline only grew 1% with flattish performance from the largest contributor Unifi, while a 9% growth at wholesaler TM Global was offset by a 10% contraction in business solutions provider TM One.TM Global’s strong performance was underpinned by higher international data revenues. This was driven by managed wavelength services for hyperscalers that contributed to global bandwidth growth of 30 Tbps. Key mega deliveries include provision of 35Tbps long-term leased connectivity for a US-based hyperscaler. Meanwhile, the weaker showing from TM One was due to price adjustments (or discounts) for certain service contracts and lesser one-off ICT (information, communications and technology) projects.

Propelled by lower taxes. In spite of higher opex, its core net profit surged by a larger magnitude of 59% on the back of tax credits (as mentioned above) and absence of Cukai Makmur. To a lesser extent, bottomline was boosted by lower depreciation, and reduced finance costs (following debt repayments). This more than offset drag from accelerated depreciation (RM197m) and manpower optimization cost (RM24m).

On the back of this, TM was able to beat its earlier FY23 guidance of flat revenue and EBIT of RM1.8b-RM2.0b (FY23 core EBIT: RM2.2b).

Resilient Unifi ARPU on limited downtrading. Unifi’s ARPU of RM131 was stable QoQ despite the re-pricing exercise implemented in Oct 2023. Hence, this implies marginal downtrading in speeds by existing customers. However, in spite of the introduction of faster speeds for entry level packages, sequential net adds were subdued at 19k (3QFY23: 19k, 2QFY23: 38k). Nevertheless, Unifi ended the year with an enlarged base of 3.1m subscribers (4QFY22: 2.9m) which translates to 137k net adds.

The key takeaways from TM’s analysts briefing are as follows:

1. TM introduced its FY24 guidance, comprising: (i) revenue growth: low single digit growth (FY23: +1.1%), (ii) EBIT: RM2.1b-2.2b (FY23: RM2.1b), and (iii) capex/revenue: 14%-18% (FY23: 15.9%). This guidance does not take into account the financial impact from the looming implementation of the new 5G Dual Network model.

2. Moving forward, TM expects taxes to normalize given that it has fully booked in its unutilized tax credits. Therefore, in FY24, TM will merely recognize normal tax incentives conferred to telco players.

3. TM expects costs to remain escalated in FY24 on the back of: (i) spillover in FY23 expenses to upgrade IT software and systems, (ii) licensing costs (for spectrum, utilities, software, etc.), and (iii) periodical asset review that results in asset accelerated depreciation etc.

Forecasts. We raise our FY24F net profit by 10% to reflect stable Unifi ARPU (we previously assumed lower APRUs post-repricing). In addition, we also introduce our FY25F numbers.

Valuations. Correspondingly, we raise our TP by 7% to RM7.22 (from RM6.76) based on unchanged 5.5x FY24F EV/EBITDA.This implies a 50% discount to pure-play broadband peerTIMECOM’s current valuation of 10.8x to reflect higher regulatory risk for TM. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like TM on account of: (i) it being leveraged towards secular data growth on the back of current trends such as digital transformation, proliferation of internet of things (IoT), AI integration etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, and (iii) earnings accretion from potential development of new hyperscale data center.

Risks to our call include: (i) higher-than-expected erosion in wholesale revenues from new Reference Access Offer prices, (ii) pricing pressures at the retail segment arising from policy-led directives, and (iii) irrational competition in the retail fiber broadband space.

Source: Kenanga Research - 26 Feb 2024

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