In line for now, Telekom Malaysia Bhd’s (TM) 3Q23 core net profit was again boosted by positive taxes. With management maintaining its EBIT guidance (which implies a softer 4Q23), Maybank Investment Bank (Maybank IB) deems the 9M23 results as being in line.
They continue to prefer TM within the telco space, as there remains ample headroom for further cost optimisation (which would lift earnings).
Maybank IB reiterate BUY with an unchanged DCF-based of MYR6.50.
Results again boosted by tax breaks
TM’s 3Q23 core net profit of MYR553m (+62% YoY, -12% QoQ) brings 9M23 core net profit to MYR1,509m (+31% YoY), 84%/99% of Maybank IB’s/consensus full year forecasts respectively.
EBITDA was in line, with net profit again being boosted by positive taxes in the quarter (recognition of tax credits from unutilised tax losses post corporate restructuring). No dividend was declared in the quarter, consistent with past practice.
Sequential revenue decline
TM’s 3Q23 revenue was down 1% QoQ due mainly to a sharp decline in Voice revenue. The enterprise segment remains soft. Internet revenue QoQ growth was also mild, due to tapering Unifi subscriber additions, partly offset by slight ARPU improvement.
Management noted the MSAP-related negotiations hampered TM’s ability to compete in a nimble manner amid a challenging operating landscape. Opex was up 1% QoQ on higher manpower costs, resulting in 3Q23 EBITDA margin contracting by 1.2ppt QoQ to 40.2%.
Expect sequentially lower 4Q23
Management is maintaining its MYR1.8-2.0b EBIT guidance, which implies an EBIT decline in 4Q23 (possibly from higher mobile-related costs and MSAP impact). Our earnings forecasts (already reflects a weaker 4Q23) and MYR6.50 DCF-based TP are unchanged.
Management is mildly optimistic o its new fibre broadband packages, noting generally positive subscriber responses and manageable down-trading.
CGSCIMB, meanwhile, said today they issues an Add call on TM with an unchanged RM6.80 TP, post 3Q23 results. Net profit tracking ahead of our and Bloomberg estimates.
Valuations undemanding at 12.9x FY24F core P/E and 4.6x adj FY24F EV/EBITDA. Street upgrades, higher dividends are key catalysts, said the research house.
9M23 core net profit ahead at 82% of full-year estimate
TM 3Q23 core net profit (assuming tax rate of 23%) of RM397m (-5.6% qoq) brought 9M23 core net profit (CNP) to RM1,145m, representing 82% of our full-year estimate and 87% of Bloomberg consensus’.
A positive tax was recorded in 3Q23 as TM continued to utilise tax losses and capital allowances following the restructuring which was completed in late-2022. Underlying performance was in-line, with 9M23 EBITDA of RM3,767m representing 74% of our full-year estimate. RM41m in manpower rationalisation expenses recognised in 3Q23 was mitigated by a RM27m reversal of 5G device costs in 3Q23.
Takeaways from the results call
Management confirmed that as it had anticipated the lower wholesale fibre broadband prices (with negotiations concluded in Nov), this is already largely reflected in the 9M23 earnings.
Any adjustments in 4Q23 are likely to be insignificant, in CGSCIMB’s view.
Management did not deny that TM could beat its RM1.8bn-2.0bn EBIT guidance.
TM’s management confirmed that following its announcement of new retail broadband prices in Nov, downtrading activity had been manageable. CGSCIMB believes TM’s 6-month free speed upgrade to customers will limit downtrading as customers will not need to be coerced into taking higher speeds which they may not have experienced otherwise.
Valuations undemanding; dividends and upgrades to drive rerating.
At 12.9x core FY24F P/E and 4.6x adj FY24F EV/EBITDA, TM’s valuations are undemanding vs. domestic peers and its historical trading range with EV/EBITDA at -0.5 s.d. of its trading range since 2018 (major regulatory price change).
Tax savings could spur street upgrades, as well as pave the way for higher dividends. Assuming 0% effective tax and a 55% dividend payout, similar to FY22, DPS could rise to 26.5 sen based on our estimates, all else being equal.
Key downside risks would be a sharp pick-up in retail broadband price competition, and changes in the tax situation causing tax rates to rise, CGSCIMB added in its Company Flash Note today (Nov 24).
