Telekom Malaysia - Harvesting Cost Optimisation Fruits

Date: 
2023-11-24
Firm: 
KENANGA
Stock: 
Price Target: 
6.76
Price Call: 
BUY
Last Price: 
6.05
Upside/Downside: 
+0.71 (11.74%)

TM’s 9MFY23 results exceeded expectations on higher-thanexpected tax credits. EBITDA expansion was driven by cost optimization and sustained Unifi subscriber base expansion. Meanwhile, bottomline growth was propelled by tax credits that more than offset accelerated depreciation. We raise our FY23F net profit by 14%, lift our TP by 3% to RM6.76 (from RM6.57) and maintain our OUTPERFORM call.

Its 9MFY23 core net profit of RM1.56b trumped expectations at 95% and 104% of our full-year forecast and the full-year consensus estimates, respectively. The variance versus our forecast mainly emanated from higher-than-expected tax credits.

YTD cost traction intact. YTD topline was flattish as higher revenues across the board were negated by lower contribution from TM One. This was due to: (i) change of accounting treatment for software revenue, (ii) deferred customer projects, and (iii) price reductions for certain large service contracts as some clients turned cost conscious.

Nevertheless, EBITDA expanded by 5% YTD as TM harvested the fruits of its cost optimization initiatives. Furthermore, this was boosted by lower staff separation costs. Coupled with chunky tax credits, this enabled TM’s bottomline to surge by 51% YTD. To recap, the credits were for previously unrecognised tax losses,

QoQ stronger in spite of lower tax credits. QoQ bottomline expanded 3% on the back of leaner costs (as mentioned above) and reduced finance expense. This more than offset drag emanating from: (i) lower revenues from TM One and TM Global, (ii) higher staff costs, including a one-off manpower optimisation initiative, and (iii) lower recognition of tax credits.

Sustained Unifi traction ahead of re-pricing impact. Unifi chalked up impressive YoY net adds of 205k subscribers on the back of convergence campaigns that offered quad play offerings. However, QoQ net adds tapered to 19k (2QFY23: 38k, 1QFY23: 61k) as new customers held back in anticipation of re-priced offerings in October. Meanwhile, its ARPU inched up QoQ to RM131 (2QFY23: RM130, 3QFY22: RM132) as enterprise customers opted for higher speed offerings.

The key takeaways from TM’s analyst briefing are as follows:

1. TM maintained its previous FY23 guidance of: (i) flat revenue (YTD: - 0.1%), (ii) EBIT of RM1.8b-RM2.0b (YTD: RM1.7b), and (ii) capex at 18%-20% of revenue.

2. After final acceptance of TM’s Reference Access Offer (RAO) by its customers, it may recognize some offsetting retrospective adjustment reversals in its P&L. This is because actual wholesale rates under TM’s RAO are slightly higher than those published under the Mandatory Standard on Access Pricing (MSAP). To recap, the adjustments are given that MSAP was effected back in 1st March. Meanwhile, TM targets to finalize its RAO with major clients by yearend.

3. TM anticipates possible EBIT weakness in 4QFY23 that may result in FY23 EBIT landing within its guidance. This may emanate from: (i) regulatory adjustments as mentioned above, and (ii) re-pricing of Unifi products earlier in October.

4. TM has fully integrated its fixed line infrastructure with its new mobile networks. This is to facilitate the introduction of more unique fixedmobile product bundles.

5. Down trading by Unifi customers following the launch of its re-priced offerings in October have been “manageable” thus far.

Forecasts. We raise our FY23F net profit by 14% to reflect higher utilisation of tax credits.

Correspondingly, we raise our TP by 3% to RM6.76 (from RM6.57) based on unchanged 5.5x FY24F EV/EBITDA. This implies a 50% discount to pure-play broadband peer TIMECOM’s current valuation of 10x to reflect higher regulatory risk for TM. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like TM on account of: (i) it being leveraged towards secular data growth by global carriers and hyperscalers on the back of current trends such as digital transformation, proliferation of internet of things (IoT), cloud AI computing etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, and (iii) sustained traction in its cost optimization initiatives.

Risks to our call include: (i) higher-than-expected erosion in wholesale revenues from new RAO prices, (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 - 24 Nov 2023

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