Maintain BUY For Telekom, With Ongoing Cost Controls, Operational Savings Buffering Against Inflation Pressures: RHB

Telekom Malaysia (TM)’s quarter one 2023 results were in line with sustained growth from the UniFi and wholesale segments. RHB Research (RHB) sees clarity on the impact of new access prices fuelling a share price re-rating with the group benefitting from structural demand drivers.

“TM remains our preferred sector pick with a parity environment, social, governance (ESG) score bolted on to our trading price. Key risks are competition, weaker than expected earnings, and regulatory setbacks,” said RHB in the recent Malaysia Results Review Report.

Quarter one 2023 core earnings of RM330.1 million made up 23% of RHB’s forecast. Overall results reflect a trend growth for internet and wholesale lines, partially offset by weaker enterprise revenue.

Following the accelerated depreciation and impairment charges taken on its network assets in quarter four 2022, TM booked a further RM163 million in quarter one 2023 covering the remaining network elements.

“We see the on-going cost controls and operational savings from the TM’s re-organisation providing some buffer against inflationary cost pressures . Our forecasts are retained for now,” said RHB.

Internet revenue expanded 6% year-on-year, supported by the expanded fibre footprint under JENDELA despite the keen competition from access seekers. Nonetheless, subs addition continues to moderate and are back to pre-pandemic levels.

Wholesale revenue grew 4% year-on-year with growth in domestic high speed broadband access and backhaul revenues offsetting the decline in international revenue.

Management expects the latter to stage a strong recovery in 2Q23 from lumpy indefeasible rights of use deals. On the Mandatory Standard on Access Pricing, TM said discussions with the Government/regulator on new access prices should conclude soon with the issuance of a revised reference access offer document.

RHB sees the impact as manageable but have imputed a 5- 10% decline in retail average revenue per unit for financial year 2023 to financial year 2024 future to be conservative.

Enterprise revenue has trended lower year-on-year/quarter-on-quarter for the second quarter in a row. TM’s enterprise segment was affected by the more than 20% reduction in the value of the MyGov*Net 2.0 contract.

“The impact to earnings is likely to be offset by lower cost to deliver the project, in our view, with a reduction in the utilisation scope,” said RHB.

With the impairment taken on non-performing data centres, TM One’s EBIT fell to RM57.6 million in quarter one 2023.

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