• BUY, DCF-based TP of MYR8.40, 25% upside with c.4% FY25F yield. Telekom Malaysia is our Top Pick for exposure to the telco sector, as it is a core digital infrastructure enabler. We see continued earnings delivery, supported by cost-down initiatives and structural drivers at play (wholesale, data centres (DCs)). This should drive incrementally higher ROEs, while its under- leveraged balance sheet portends upside risk to dividends. A 4% ESG premium is baked into our TP to reflect TM’s growing sustainability efforts.

• Earnings tailwinds from opex efficiencies. Despite the competitive headwinds, regulatory pressure and economic challenges, TM’s opex (ex depreciation) has been relatively steady over the past three years, with the successful execution of its 3-year performance improvement programme. We see continuing strong focus on cost shoring earnings, as the group navigates the keen competition on the retail front.

• Data revenue is set to remain a core growth driver, with TM capitalising on the digital infrastructure boom. We estimate its internet revenue CAGR for FY23-26F at 5.1%, underpinned by the still-modest fibre broadband (FBB) household penetration in the country (2Q24: 49%) and promotional activities.

• JV on artificial intelligence (AI)-DC provides a new recurring revenue stream; could potentially add MYR0.37 to TM’s value. We are positive on its landmark JV with Singtel (ST SP, BUY, TP: SGD3.50) to build a 64MW DC (Phase 1) in Johor to capture the spillover of DC inventories from the island state. Together with the on-going expansion of its twin core facilties in Cyberjaya and Iskandar Puteri (IT load capacity is set to double up to 40MW by FY26F), we see the DC EBITDA (undislosed but minimal currently in the overall context of the group) potentially doubling up in FY27F on optimal utilisation. We estimate the DC JV could potentially contribute c.MYR80-85m earnings to the group or c. 4% of group PATAMI (based on TM’s stake) in FY27, or about MYR0.37 to TM’s DCF valuation.

• Valuation still undemanding on decent growth. We see TM delivering respectable FY24-26F core earnings CAGR of 11.3%, supported by healthy growth in data and internet revenues, and cost discipline. The counter is still trading at an undemanding valuation, at a 12% discount to its historical 10- year EV/EBITDA mean. There is upside risk to DPS, given the group’s strong FCF and under-leveraged balance sheet (FY24F net debt/EBITDA at 0.9x). Our DCF-based TP of MYR8.40 implies a prospective EV/EBITDA of 6.8x.

• Key downside risks are intensifying FBB competition, weaker-than-expected earnings/dividends and regulatory setbacks.

Source: RHB Research - 2 Oct 2024