Telekom Malaysia
Upgrade cycle to continue
- We raise our FY24F/25F/26F core net profits by 3.3%/1.1%/1.7% post 2Q24 results, leaving us at 104%/115%/122% of Bloomberg consensus estimates.
- Despite increased competition in retail broadband, we see TM’s overall data revenues expanding at a 4% CAGR between FY23 and FY26F.
- At 13.3x FY25F core P/E, 18.3% FY25F ROE, and 3.9% FY24F dividend yield, TM’s valuations are attractive vs. its regional and domestic peers.
Upward trajectory intact despite retail competition
Despite increased competition in the retail broadband segment, we expect Telekom Malaysia’s (TM) overall data revenues (retail, enterprise, and wholesale) to grow at a 4% CAGR over FY23-26F. As the largest fibre network provider in the country, TM is also the largest provider of wholesale broadband access to other ISPs. As such, it is still capturing a sizeable portion of the country’s broadband revenues, albeit with reduced economics if the customer lost was from a higher ARPU band. We also see domestic wholesale revenue ticking up in 2025F as 5G network rollouts accelerate, driving demand for transmission capacity. Additionally, the completion of recent data centre builds should also provide added demand for terrestrial and international fibre capacity. In 1H24, TM’s overall data revenue was up 3.0% yoy, even as retail broadband revenue grew by 1.1% yoy in the same period.
Raising estimates post 2Q24 results
We raise our FY24F/25F/26F core net profit estimates by 3.3%/1.1%/1.7% post 2Q24 results, taking our core net profit to 104%/115%/122% of Bloomberg consensus estimates. Key changes to our estimates include lower low-margin voice hubbing revenue and reduced depreciation expenses on lower capex estimates. We believe that following the 3Q24 results season in late-Nov, consensus estimates could rise further beyond management’s conservative FY24F EBIT guidance of RM2.1bn-2.2bn, with TM having already delivered RM1.26bn in 1H24. The one area where TM has room to surprise positively in 2H24F is dividends. With an FY24F FCF of RM1.2bn (RM0.32/share) and an under-leveraged balance sheet (0.69x net debt-to-EBITDA as at end-Jun 2024), we believe there could be room for more special dividends in FY24F.
13.3x FY25F P/E and 3.9% FY24F dividend yield attractive
We reiterate our Add call on TM with a higher GGM-derived (ROE 18.3%, COE 8.8%, LT growth 4%) target price of RM8.60 (previously RM8.56) on our higher forecasts. We see TM’s continued earnings growth supporting an expansion in ROE, which we believe the market is still not fully pricing in. Continued earnings delivery, coupled with further data centre-related newsflow, could serve as re-rating catalysts. Key downside risks include increased regulatory intervention by the government (e.g., higher discounts) and increased competition in wholesale fibre provision, should a competitor choose to roll out a fresh nationwide network.
The broker is CGS International Securities, with a recommendation to Add the stock and a target price of RM8.60.
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