Investment Highlights

• We maintain BUY on Telekom Malaysia (TM) with a higher DCF-based fair value (FV) of RM7.02/share (v. RM6.70/share previously), (WACC: 7.5%; terminal growth: 1.5%). Our FV implies an FY24F PE of 16x, which is below its 5-year mean of 18x. No change to our neutral 3-star ESG rating.

• TM’s FY23 net profit of RM1.9bil was within our expectations but 11% above street’s. Management has declared a 2nd interim single-tier dividend of 10.5 sen per share and a final single-tier dividend of 5.0 sen per share, bringing FY23 total gross DPS of 25.0 sen, translating into 50% dividend payout ratio. FY23 DPS is 1.5x higher than FY22 DPS of 16.5 sen, and the highest yearly dividend payout since 2018.

• We have raised TM’s FY24F-FY26F earnings by 16%-23% to account for future potential recognition of tax credits from unutilised tax losses carried forward. Even so, FY24F core net profit is expected to decline by 10% due to a normalisation of tax expense from a positive charge in FY23.

• TM’s FY23 net profit increased by 64% to RM1.9bil on the back of lower net interest expense and a positive tax charge of RM77mil (vs. a RM542mil tax expense in FY22) arising from the recognition of tax credits. Additionally, TM delivered decent topline growth of 2% led by TM Global (+10% YoY) and Unifi (+1% YoY).

• FY23 was a stellar year for TM Global as it registered topline growth of 9% underpinned by strong domestic and global data demand. TM continued to expand 5G backhaul sites and high-speed broadband nationwide and successfully delivered more than 35 Tbps long term leased connectivity to US-based hyperscalers. Additionally, Unifi’s subscribers rose 5% to 3.1mil in FY23 due to convergence campaigns and aggressive retention activities.

• TM’s EBIT was flattish at RM2.1bil in FY23 due to higher operating cost (+1% YoY). This arose from higher utilities expenses and increased spectrum license and software costs. The impact was partly mitigated by declines in manpower expenses (-2% YoY) and depreciation (-2% YoY).

• QoQ, 4QFY23 net profit (excluding cumulative RM173mil forex gain, reversal of 5G provision and one-off impairment) declined by 20% to RM434mil, dragged by higher operating costs (+8% QoQ) and depreciation cost (+7% QoQ). Also, TM’s revenue was flat at RM3.1bil in 4QFY23. Although TM One’s revenue increased by 17%, this was offset by a decline in TM Global’s topline. TM One benefited from improved orders on solution-based projects in 4QFY23.

• For FY24F, management have guided a single low-digit revenue growth and mild EBIT growth to RM2.1bil-RM2.2bil. We estimate FY24F capex at RM2.3bil (vs. RM2.2bil in FY23) – which translates to 18% of revenue. This is at the high end of management guidance of 14%-18%.

• Going forward, we are cautious on potential cost pressures arising coming from TM’s tech refresh exercise. This involves TM transforming its business support system (BSS) to enhance the customer service experience. Currently, the cost of the program is unknown but it is expected to be substantial as TM’s software is subscription- based and not internally owned. A silver lining is that the impact may be cushioned by savings from TM’s 3-year cost optimisation exercise, which could mitigate operating and manpower cost growth.

• We continue to like TM as it is expected to be a beneficiary of the national 5G Dual Wholesale Network (DWN) arrangement. TM is envisaged to enjoy higher wholesale business income from 5G rollouts and demand from data centres. Presently, Singapore has limited capacity to cater to demand from the data centre industry due to environmental and regulatory concerns.

• TM is currently trading at a compelling FY24F PE of 14x, which is below its 5-year historical average of 18x, while offering a decent dividend yield of 3%.

Source: AmInvest Research - 26 Feb 2024