RAM Ratings said it views the recent novation of Telekom Malaysia Berhad’s (TM or the Group) sukuk to TM Tech following an internal reorganisation by the Group to be credit neutral to the rated sukuk. Subsequent to this exercise, the Group’s core businesses were transferred to TM Tech. Given the inextricable financial and operational linkage between TM Tech and TM – with the former being now the Group’s main earnings contributor, RAM said it views the two entities in aggregate from a rating perspective.
TM’s expected continued dominance of the local fixed-broadband, fixed-line services and telecommunication industry anchors the affirmation of the ratings. The Group’s critical role and strong relationship with the Government of Malaysia solidify its position. Based on RAM’s rating methodology for government-linked entities, both TM and TM Tech are deemed highly likely to receive extraordinary support in the event of financial distress.
In FY Dec 2022, TM’s revenue rose 5.1%, thanks mainly to the Unifi and TM Global segments. Profitability saw a healthy uplift, with the Group’s unadjusted operating profit before depreciation, interest and tax (OPBDIT) margin clocking in at 39.7% as costs remained under control. Improved earnings, coupled with active debt management, resulted in better leverage and debt coverage ratios. TM’s gearing hit a low of 0.87 times as at end-December 2022 while fiscal 2022 funds from operations debt coverage stood at 0.65 times.
From an industry standpoint, 5G is touted as the next technological advancement to turnaround stagnating earnings growth for the sector. Stronger demand for data and digitalisation via 5G is a boon, but any resultant uptick in earnings in the retail (unifi, TM One) and wholesale (TM Global) segments is likely to be seen only in the medium term. For now, the government’s decision to move to a dual wholesale network ends an impasse on the country’s 5G network deployment mode/design. Separately, pro-consumer regulatory policies around the new Mandatory Standard on Access Pricing that came into effect on 1 March 2023 are likely to weigh down TM’s earnings.
The weakening ringgit gives rise to increased forex risk from the portion of the Group’s debts that are denominated in foreign currencies (end-December 2022: 36% of total debts). We note that the exposure is hedged using forward contracts, cross-currency swaps and options. Despite ongoing uncertainties and challenges, TM’s financial metrics are expected to stay steady due to financial discipline in previous years, focused on deleveraging and improving operational efficiencies.
