TM's 9MFY24 results were in line with expectations, with Unifi's QoQ recovery standing out as a positive surprise. Despite topline weakness from softer voice service demand and chunky one-off manpower costs, pretax profit surged. This was largely attributed to the absence of accelerated depreciation. We maintain our forecasts, TP of RM7.53 and OUTPERFORM call.

Tracked expectations. 9MFY24 core net profit of RM1.25b was within expectations - coming in at 72% and 77% of our full-year forecast and the consensus estimate, respectively.

Dragged by weaker demand for voice services. 9MFY24 revenue declined slightly by 2% year-on-year, primarily due to softer demand for international voice services, driven by the growing adoption of online conferencing platforms.

Topline weakness, coupled with chunky one-off manpower optimization expense (RM57m), led to the larger EBITDA decline of 4.6% YTD.

Despite this, pretax profit soared 28% YTD, primarily due to the absence of accelerated depreciation and reduced interest expenses. However, core net profit contracted by 23%, as 9MFY23 benefited from the recognition of tax credits from unutilized tax losses.

Unifi's sequential uptick signifies resilience. On a positive note, Unifi's sequential net adds and ARPU showed a strong rebound in 3QFY24, rising to 48k (2QFY24: 11k) and RM130 (2QFY24: RM128), respectively. This was attributed to higher devices and mobile revenue.

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

1. Notable activities by TM Global during 3QFY24 include: (i) concluded sizable Indefeasible Right of Use (IRU) deals from global carriers fuelled by the surge in data consumption, and (ii) secured large western bloc requirement from hyperscalers. Looking ahead, we are optimistic that these new contracts will strengthen revenue growth in the data segment, offsetting the impact of declining voice demand and intensified competition in the retail broadband market.
2. TM remains confident in its ability to adapt to the ongoing industry trend of declining voice demand. The group is pivoting towards growth opportunities in data, a strategy that has yielded positive results to date, as reflected in a 3.2% YTD growth in data revenue.
3. Major projects undertaken by TM One in 3QFY24 comprise: (i) launched first 5G private campus network in Malaysia for Petronas, and (ii) collaboration with KPJ to provide advanced software-defined wide area network (SD-WAN) internet services.

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, (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 global submarine cables and domestic 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 Nov 2024