MIDF Research (MIDF) maintains a NEUTRAL call on Telekom Malaysia Berhad (TM) with a revised target price of RM5.58 following the group’s 4QFY23 results announcement.
In a note today (Feb 26), the research house cited that TM’s FY23 financial performance come in slightly better than expected due to favourable taxation and the tax effective tax rate should return to normalcy from FYF24.
TM anticipates earnings to trend lower for the next two years as the future revenue growth unable to make up for the normalisation of the effective rax rate.
Earnings pressure in FY24
MIDF is keeping their NEUTRAL recommendation on TM with a revised target price of RM5.58 (previously RM5.22) after taking into consideration 4QFY23 results and FY24 guidance from the management. They anticipate steady revenue from across all the segments.
However, MIDF said it would be insufficient to make up for the normalisation of tax rate in FY24 following the utilisation of the tax credit as seen in FY23.
Quarterly earnings doubled
TM’s 4QFY23 earnings grew by more than +100%yoy RM433.5m. This was mainly attributable to the tax credit of RM46.3m as opposed to tax charge of -RM53.6m for 4QFY22.
Notwithstanding this, profit before tax expanded by +84.0%yoy to RM 393.7m in view of lower depreciation and amortization charges of RM707.6m (-28.1%yoy).
Better-than-expected annual performance
The above led to better-than-expected FY23 earnings of RM1,870.5m (+46.2%yoy). In absence of the tax credit, MIDF deduced that the earnings would only improve by about +6.5% yoy.
The profit before tax only grew by +7.2%yoy to RM1,686.5m. as revenue remains stagnant at RM12.2b
(+1.1%yoy).
All in, FY23 financial performance came in slightly better than expected at 107.2% of our FY23 full year earnings estimates.
Cost ratio remains elevated
The total cost to revenue ratio for FY23 stood at 84.2%, up from 83.9% a year ago. This was mainly due to higher operational cost of RM2.0b (+16.0%). Meanwhile, the direct cost, manpower and depreciation and amortization costs declined between – 0.5%yoy to -2.3%yoy.
Capex takes a back seat in FY23. FY23 capex tapered off by -20.0%yoy to RM1,944m due to lower spending across access (-2.4%yoy), core (-34.6%yoy) and support (-37.4%yoy). This led to a lower capex-to-revenue ratio of 15.9% from 20.0% achieved in FY22.
Nonetheless, given the group’s FY24 capex-to-revenue ratio guidance of 14% to 18%, capex could potentially come in at above RM2b.
Limited revision in earnings estimates
Taking cue from the FY23 results as well as the group’s FY24 guidance, MIDF is only adjusting FY24 and FY25 earnings estimates by +1.2% and -3.8% respectively.
However, MIDF’s DCF derived target price has been revised up to RM5.58 from RM5.22 previously. Note that beyond FY25 MIDF has have assumed better EBITDA performance.
TM’s FY23 results beat expectations
Kenanga Research, a division of Kenanga Investment Bank Berhad said today TM’s FY23 core net profit surged 59% driven largely by reduced interest cost, chunky tax credits and the absence of Cukai Makmur. It also beat its earlier FY23 revenue and EBIT guidance.
Kenanga raises their FY24F net profit projections by 10% and lifted their TP by 7% to RM7.22 (from RM6.76) and maintain an OUTPERFORM call.
Trumped expectations
Its FY23 core net profit of RM2.0b exceeded our forecast by 6% and the consensus estimate by 16%. The variance versus our forecast was mainly attributed to higher-than-expected recognition of tax credits from unutilised tax losses.
In-line with our expectations, TM declared 4QFY23 DPS of 15.5 sen which brought cumulative FY23 DPS to 25.0 sen (FY22: 16.5 sen). FY23 core net profit excludes: (i) FX charges (RM36m), (ii) reversal of 5G device provisions (RM31m), and (iii) asset impairments (RM152m).
Yoy, its FY23 topline only grew 1% with flattish performance from the largest contributor Unifi, while a 9% growth at wholesaler TM Global was offset by a 10% contraction in business solutions provider TM One.TM Global’s strong performance was underpinned by higher international data revenues.
This was driven by managed wavelength services for hyperscalers that contributed to global bandwidth growth of 30 Tbps.
Key mega deliveries include provision of 35Tbps long-term leased connectivity for a US-based hyperscaler.
Meanwhile, the weaker showing from TM One was due to price adjustments (or discounts) for certain service contracts and lesser one-off ICT (information, communications and technology) projects.
Propelled by lower taxes
In spite of higher opex, its core net profit surged by a larger magnitude of 59% on the back of tax credits (as mentioned above) and absence of Cukai Makmur. To a lesser extent, the bottom line was boosted by lower depreciation, and reduced finance costs (following debt repayments).
This more than offset drag from accelerated depreciation (RM197m) and manpower optimisation cost (RM24m). On the back of this, TM was able to beat its earlier FY23 guidance of flat revenue and EBIT of RM1.8b-RM2.0b (FY23 core EBIT: RM2.2b).
Resilient Unifi ARPU on limited downtrading
Unifi’s ARPU of RM131 was stable QoQ despite the re-pricing exercise implemented in Oct 2023.
Hence, this implies marginal downtrading in speeds by existing customers. However, in spite of the introduction of faster speeds for entry level packages, sequential net adds were subdued at 19k (3QFY23: 19k, 2QFY23: 38k).
Nevertheless, Unifi ended the year with an enlarged base of 3.1m subscribers (4QFY22: 2.9m) which translates to 137k net adds.
The key takeaways from TM’s analysts briefing are as follows:
1. TM introduced its FY24 guidance, comprising: (i) revenue growth: low single digit growth (FY23: +1.1%), (ii) EBIT: RM2.1b-2.2b (FY23: RM2.1b), and (iii) capex/revenue: 14%-18% (FY23: 15.9%). This guidance does not take into account the financial impact from the looming implementation of the new 5G Dual Network model.
2. Moving forward, TM expects taxes to normalize given that it has fully booked in its unutilized tax credits. Therefore, in FY24, TM will merely recognise normal tax incentives conferred to telco players. Kenanga added.
Tepid guidance
Maybank Investment Bank Berhad (Maybank IB) , in a note today (Feb 26), said TM’s 4Q23 core net profit was above consensus expectations due again to positive taxes.
The management is guiding for stable EBIT, and a nonrecurrence of tax credits (from utilised tax losses) in FY24.
Despite the tepid guidance, Maybank IB noted that TM’s strong FCF generation leaves ample headroom for increased dividends longer term.
Maybank IB reiterates BUY with a higher DCF-based TP of MYR6.80 (+4%).
Results slightly above
TM’s 4Q23 core net profit of MYR400m (+331% YoY, -28% QoQ) brings FY23 core net profit to MYR1,909m (+53% YoY), 6%/13% above full-year forecasts.
EBITDA/EBIT were in line, with net profit being boosted by lower net interest and positive taxes (utilisation of tax losses post corporate restructuring) in the quarter.
A 15.5sen DPS (+107% YoY) was declared for the quarter, bringing full year DPS to 25sen (+52% YoY), representing a 50% payout ratio.
Revenue trends again soft
4Q23 revenue was up 2% QoQ due mainly to the seasonal uptick in “Others” revenue (lumpy project billings in 4Q).
“Internet” revenue was also up a mere 1% QoQ, as Unifi net subscriber additions continue to stay weak.
Management noted that gross additions had shown an encouraging trend since the new retail plans were launched. Churn however has remained elevated due to competition.
Opex trended higher due to impairments, resulting in 4Q23 EBITDA margin contracting by 4.5ppt QoQ to 35.7%. Maybank IB maintains a BUY call for FY24, where the management is guiding for 1) MYR2.1-2.2b EBIT (stable YoY) on low-single digit revenue growth, and 2) 14-18% capex/sales.
Management also noted tax losses have been largely utilised.
Maybank IB lowered their FY24/25 net profit forecasts by 3%/2% respectively on housekeeping and introduce FY26 forecasts. Maybank IB’s DCF-based TP (assuming 8.6% WACC and 2% growth) is raised to MYR6.80 (from MYR6.50).
