TM’s 1HFY24 results tracked expectations as topline was flattish due to a drag by Unifi. Expansion in pretax profit (due to absence of accelerated depreciation) was offset by the absence of tax incentives, resulting in weaker bottomline. Moving forward, TM expects tremendous revenue opportunities in DC-to-DC connectivity. We maintain our forecasts, TP of RM7.53 and OUTPERFORM call.

In line with no surprises. 1HFY24 core net profit of RM833m was within expectations – coming in at 48% and 52% of our full-year forecast and the consensus estimate, respectively.TM declared maiden DPS for FY24 of 12.5 sen (2QFY23: 9.5 sen), which was within our expectation.

Flattish topline due to weakness at Unifi. 1HFY24 revenue was flattish YoY as weaker revenue from Unifi offset broad-based expansion across other businesses, including: (i) TM Global: propelled by higher sales from managed wavelength and domestic data, and (ii) TM One: underpinned by increased customer projects and a one-off settlement.

At Unifi, its ARPU weakened due to promotional discounts and a higher number of new subscribers on entry-level packages. Furthermore, this was exacerbated by declines in its voice and mobile service. On the bright side, Unifi’s subscriber net adds inched up sequentially to 11k (1QFY24: 9k), likely due to attractive discounting.

PBT up on normalized depreciation. 1HFY24 EBITDA contracted by 4% YoY as manpower costs jumped due to higher manpower right-sizing cost and staff remuneration. In spite of this, pretax profit expanded by 25% YoY due to the absence of accelerated depreciation. However, core net profit declined by 21% as 1HFY23 was boosted by the recognition of tax credits from unutilised tax losses.

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

1. TM is awaiting the outcome of the Malaysian Communications and Multimedia Commission's (MCMC) review of its bid to build Malaysia’s second 5G network. This follows the recent termination of its share sale agreement with Digital Nasional Berhad (DNB), which could potentially impact its tender. Nevertheless, this is within our expectation, as we have not factored in the possibility of TM securing a stake in DNB.

2. TM highlighted tremendous earnings opportunities in providing connectivity services for data centers (DC) in Johor, including regional DC-to-DC connectivity for hyperscalers. Moreover, TM is confident that its partnership with an incumbent in Singapore will enhance its ability to deliver these services. Despite anticipated competition from TIMECOM and international incumbents (e.g.Starhub) TM remains confident of its growth prospects in this space.

3. Activities by TM Global on the international front during 1HFY24 include: (i) secured indefeasible right of use (IRU) deals from global carriers. (ii) delivered managed wavelength solutions for hyperscalers by establishing connectivity infrastructure between Malaysia and Singapore, and (iii) completed network deployment for a facilities-based operator in Singapore.

Forecasts. Maintained.

Valuations. We also keep our TP of RM7.53 based on unchanged 7.0x FY25F EV/EBITDA. 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), cloud services powered by generative AI, etc, (ii) it benefitting from upcoming JENDELA phase 2 projects via roll-out and monetization opportunities, and (iii) earnings accretion from development of new hyperscale data center, and (iv) higher demand for data transmission via its network of digital infrastructure that includes submarine cables and landings as well as fiber optics backhaul. Maintain OUTPERFORM.

Risks to our call include: (i) cost drag from Unifi Mobile due to lack of scale, (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 - 27 Aug 2024