Higher earnings growth expected for company, say research analysts PETALING JAYA: Telekom Malaysia Bhd (TM) is expected to see earnings growth from its unifi and Internet revenues, as well as cost savings moving forward, according to RHB Research. TM remains a key beneficiary of the infrastructure roll-out, under the national digital infrastructure plan (Jendela). The research unit said strong unifi net additions are expected to continue in 2021 and 2022 due to higher fibre broadband subscriptions from extended work and study-from-home arrangements, the aggressive targets for fibre premises passed under Jendela, and the ongoing conversion of Streamyx customers to fibre, with the impact from the September 2019 re-pricing behind TM. TM added a record 97,000 unifi subscribers in the third quarter of 2020 (3Q20), due to strong broadband take-up from the teleworking phenomena (6.3% increase quarter-on-quarter subscriber growth). “For the first nine months of 2020 (9M20), TM added 204,000 new unifi subscribers, more than the average of 170,000 additions per annum in 2017 to 2019, ” said the research unit. While management has guided for an additional 500,000 fibre premises passed in 2021 to 2022, chief executive officer Imri Mokhtar, who was appointed in Aug 2020, had said TM is keen to lay fiber optic cables up to 1.6 million premises (of 2.5 million new premises under Jendela). RHB Research believes that TM is prepared for bigger fibre investments, which will complement its wholesale (9M20: 20% of revenue) strategy – with mobile operators riding on its fibre infrastructure to extend their reach into homes, alongside increased demands for mobile backhaul infrastructure. Meanwhile, the accelerated digitalisation trend by enterprises is positive for TM’s data revenue via demand for cloud services. TM should also benefit from Budget 2021 grants or initiatives extended to small and medium-sized enterprises, with renewed public sector information and communications technology (ICT) spending (after some delays due to Covid-19). RHB Research gathered TM is seeing renewed demand for connectivity and data centre (DC) solutions from over-the-top (OTT) companies, with new deals clinched on content delivery services from an Asian-based OTT player. It may kick-start Phase 2 of its Klang Valley Data Centre, if DC pipelines remain strong. Meanwhile, TM is targeting a further RM500mil in cost savings over the next three to five years. Operating expenditure (opex) savings would come mainly from staff, operations and maintenance, and the upgrade of its IT systems (including a new business support system platform). RHB Research noted that opex had fallen 13% from 2017 to 2019, (9M20: 8% drop year-on-year) on good cost vigilance. The research unit has lifted TM’s estimated core earnings for financial years 2021 to 2023 (ending Dec 31) by 8% to 12%. Meanwhile, UOB Kay Hian Research also expects TM to record 4Q20 core net profit of RM315mil, representing a sequential growth of at least 10%. This will bring 2020 net profit to above RM1bil and likely ahead of market’s expectation. Key earnings drivers include encouraging unifi subscriber growth on the back of wider network coverage – most of this are from entry-level packages; stable blended average revenue per user (ARPU) despite dilution from entry-level packages because of value-added buy-ins; a seasonally stronger TM ONE contribution; and good cost discipline (margin expansion). UOB Kay Hian Research also noted that a strong finish may also lead management to comfortably pay better dividends, and expects a 60% dividend payout, which translates to a net dividend yield of 3%. “TM’s subscriber growth trajectory and stable ARPU are expected to spill over to 2021, ” said the research unit. A 1% increase in subscriber growth will lift TM’s 2021 net profit by 1.3%. In addition, TM ONE’s job recovery appears to sustain beyond 4Q20 as public sector works have resumed after two years in the doldrums. TM ONE’s orderbook had dropped in 2018 and 2019 (3% and 4% drop year-on-year respectively) following the change in Malaysia’s government. UOB Kay Hian Research believes the two years’ respite has led to pent-up demand for ICT and special project works, and is expecting good near-term prospects for TM ONE in 2021 and 2022 (typically a 24-month implementation period). The research unit has raised its conservative earnings forecast for TM by 7%/20%/26% for 2020 to 2022 respectively. RHB Research maintained its Buy call on TM, which is its preferred sector pick, at a new discounted cash flow (DCF)-based RM7.20 target price, from RM5.60 previously. UOB Kay Hian Research upgraded TM to a Buy call, with a higher target price of RM7.
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