KUALA LUMPUR (Aug 20): CGS-CIMB Securities Sdn Bhd said today it ranks Telekom Malaysia Bhd (TM) as the second best from an environmental, social, and governance (ESG) perspective among the four Malaysian telecommunication companies (telcos) under the research firm’s coverage on factors including TM’s ability to consistently meet regulator’s quality of service (QoS) key performance indicators (KPIs) and relatively lower regulatory risks versus mobile telecommunication players.

In a note today, CGS-CIMB analysts Foong Choong Chen and Sherman Lam Hsien Jin said the research firm has also noted TM's effort to implement a robust cybersecurity framework and position itself to capitalise on the growth in demand for cybersecurity services.

"TM is our top-ranked telco for: i) network QoS, reliability and affordability, as it has consistently met the regulator’s QoS KPIs and relatively lower regulatory risks vs. mobile operators, and ii) data privacy/security, as it has the lowest risk of reputational damage from data breaches among the telcos and is best placed to capitalise on the future growth in demand for cybersecurity services, in our view.

"This leads us to rank TM as the second best Malaysian telco from an ESG perspective. On an absolute basis, we do not expect TM’s good ESG performance to have a material positive impact on revenue/earnings, as we believe the latter is more likely to be impacted by issues such as competition, mergers & acquisitions and regulatory developments,” Foong and Lam said.

They said CGS-CIMB’s decision to rank TM as the second best Malaysian telco from an ESG perspective also takes into consideration TM’s effort to ensure no independent directors in the company exceed the nine-year tenure limit as recommended in the Malaysian Code on Corporate Governance, its stringent measures to reduce corruption cases, besides its aim to reduce carbon emission every year since 2017.

The analysts, however, did not specify in the note which company CGS-CIMB ranks as the best Malaysian telco from an ESG perspective.

According to CGS-CIMB’s note, the research firm's telco coverage includes Malaysian firms TM and Maxis Bhd.

CGS-CIMB has a TM share target price (TP) of RM7 with an "add" call while its Maxis TP is indicated at RM4.60 with a "hold" call, according to the note which was issued ahead of TM’s second quarter financial results announcement next Friday (Aug 27).

Today, the analysts said TM's core net profit for the second quarter ended June 30, 2021 (2QFY21) could have eased in quarterly terms but still on track with CGS-CIMB’s FY21 full-year forecast.

"TM will report 2QFY21 results on Aug 27, 2021. After an exceptionally strong 1QFY21, we estimate core net profit fell 25%-28% quarter-on-quarter (q-o-q) (down 7%-10% year-on-year [y-o-y]) to RM240 million-RM250 million. 

"This would bring 1H21F core net profit to RM570 million-RM580 million (up 12-14% y-o-y), on track at 49%-50% of our FY21F (Bloomberg consensus: 50-51%),” they said.

In accounting terminology, a company’s core net profit is derived by excluding extraordinary items in the firm’s financial statements.

For 2QFY21, TM's strong Unifi fibre optic internet take-up drove the company's internet revenue higher q-o-q and y-o-y while data revenue could have eased q-o-q after lumpy indefeasible right of use (IRU) sales in 1QFY21, according to CGS-CIMB.

In telecommunication sector terminology, IRU refers to an owner-lessee telecommunication asset lease contract which cannot be undone.

The analysts said CGS-CIMB believes TM's internet revenue rose 2%-4% q-o-q and 8%-10% y-o-y in 2QFY21.

"We estimate data revenue fell q-o-q in 2QFY21, after lumpy IRU sales significantly boosted 1QFY21. Y-o-y, it was likely driven up by continued growth in fibre leasing demand for mobile backhaul and wholesale high speed broadband access. 

"Other revenue was likely softer q-o-q as the delivery of customer ICT projects should have been delayed by the (Covid-19-driven) movement restrictions but up y-o-y as 2QFY20 was also affected by the first Movement Control Order. Meanwhile, voice revenue was likely about flat q-o-q and y-o-y," the analysts said.

The analysts said today CGS-CIMB believes TM could registered one-off charges in 2QFY21 due to further resource optimisation as part of the group's transformation programme.

"While this likely led to lumpy one-off costs being booked in 2QFY21, we are positive on such initiatives as they help to structurally lower TM's costs going forward. 

"Meanwhile, other opex (operating expenditure) should have normalised q-o-q from the very low levels in 1QFY21. Altogether, on lower revenue and higher costs, we see EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin easing 4%-5% pts q-o-q (down 1%-2% pts y-o-y) to about 36%," they said.

According to TM's Bursa Malaysia filing, the company's 1QFY21 net profit rose to RM325.47 million from RM152.52 million a year earlier while revenue climbed to RM2.81 billion from RM2.56 billion.

At 11.22am today, TM shares were traded unchanged at RM5.84 which values the company at about RM22.02 billion.

TM has 3.77 billion issued shares, according to its latest quarterly financial report.