Investment Highlights

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

• TM’s 1QFY24 core net profit of RM425mil was within our expectations and consensus. Hence, we make no changes to our FY24F-FY26F earnings.

• TM’s CNP rose by 29% YoY in 1QFY24 from RM330mil in 1QFY23 due to lower depreciation expense (-20% YoY).

• TM’s revenue increased slightly by 2% YoY to RM2.8bil in 1QFY24 from positive performances in TM Global’s domestic and international segments. There was an increase in 4G and 5G backhaul sites domestically and sales of indefeasible rights of use (IRU) capacity.

• On a negative note, Unifi’s revenue dropped by 3% YoY in 1QFY24 due to lower utilisation of voice and mobile services. Fixed broadband subscribers, however, increased to 3.1mil (vs. 3mil previously) on the back of attractive converged bundling packages. Unifi’s ARPU eased to RM130/per month in 1QFY24 from RM131/per month in 1QFY23.

• Sequentially, TM’s 1QFY24 CNP dipped 2% QoQ from RM434mil in 4QFY23 as revenue declined in all of the business segments: TM One (-21% QoQ), TM Global (-4% QoQ) and Unifi (-1% QoQ).

• On the bright side, total cost-to-revenue ratio declined to 78% from 89% in 4Q23 due to lower opex cost (-41% QoQ), direct cost (-18% QoQ) and depreciation cost (- 13% QoQ).

• 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%. For FY24F, management have guided for a low single-digit revenue growth and EBIT of RM2.1bil-RM2.2bil.

• 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.

• It is worth noting that TM has engaged with US-based and China-based hyperscaler clients under its TM Global business. We think TM, a government-linked company (GLC), is poised to capitalise from foreign direct investments into data centres given its extensive fibre infrastructure and established local presence, particularly in providing secure locations for government and public data. TM has also expressed its dedication to future investments aimed to fulfil growing demand for data centre services.

• 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 - 31 May 2024