For 3QFY24, Telekom Malaysia (TM) posted a 13.6% YoY decline in headline net profit to RM465.1m, mainly due to the absence of tax credit. Revenue was flattish but pretax profit was lifted (+32.3% YoY) by lower operating cost. Excluding a one-off arbitration settlement, 9MFY24 results were in line with market forecast but above our expectation due to lower-than-expected depreciation cost. We raise our FY24F earnings forecasts by an average of 6% to account for the lower cost. TM remains our top pick in the telco space owing to its leading position as the country's key network infrastructure provider. In addition, we believe TM is likely to be a beneficiary of 5G deployment as well as the booming data centre industry in Malaysia. Maintain Outperform with unchanged TP of RM8.80.

• 3QFY24 revenue was down 1.2% YoY, as the increase in TM One revenue was offset by the decline in unifi and TM Global revenue. TM One saw a 1.9% increase due to higher customer projects and other telco services. Unifi revenue was down 1.0% despite a 2.1% growth in subscriber base as the new additions were mainly the entry level users. In addition, more promotional discounts were offerred during the period. TM Global revenue fell 3.9% due to lower global voice traffic and lower Managed Wavelength.
• 3QFY24 net profit fell by 13.6% YoY, due to the recognition of tax credit in 3QFY23. However, pretax profit jumped 32.3% YoY on lower total cost. Although operational cost rose 24.3%, this was offset by a 9.8%, 6.3% and 7.8% decline in direct, manpower and depreciation cost respectively. Hence, total cost-to-revenue improved from 82.7% to 82.3%.
• Outlook. In a race to become a leading digital hub for this region, we expect more new infrastructure (i.e data centres, internet exchange points, cable landing stations and fibre optic cables) to be developed in Malaysia in order to cater for the expanding IT load in the future. TM is seen as one of the prime beneficiaries of this booming market, as major cloud and internet companies would also demand for greater terrestrial connectivity as well as global subsea cable networks. We have yet to factor in any earnings contribution from its collaboration with Singtel to build a greenfield data centre in Johor, as we are only expecting this project to be accretive after FY26F. Although the appointment of the second 5G network operator has been made, we believe there are still roles for TM to play in supporting the 5G ecosystem (i.e. the leasing of its fibre) and hence, is likely to be a beneficiary of the 5G rollout plan of the second network operator.

Source: PublicInvest Research - 27 Nov 2024