KUALA LUMPUR (Sept 25): Kenanga Research has upgraded Telekom Malaysia Bhd (TM) to 'outperform', with a higher target price of RM4.95 (from RM4.20), as it sees the return of Imri Mokhtar as group managing director and CEO spurring some positive tailwinds for the group's profitability via a leaner cost structure, on top of the group's progressively broader market penetration.
"Recall that he led various efforts in moving the three-year Performance Improvement Plan 2018 forward during his earlier tenure. As businesses progressively reopen and customer acquisitions pick up pace, we do not discount opportunities for streamlining as inefficiencies surface.
"Efforts may include contract re-negotiations with vendors and manpower reorganisation to boost efficiencies in certain business units. Further, past administration’s goals to extend Unifi mobile’s presence could be shelved, leaving the group with more resources to focus on key products," it wrote in a note to clients today.
In addition, the National Digital Infrastructure or JENDELA's target to increase fixed broadband availability to 7.5 million premises by 2022, from 4.5 million this year, is expected to bode well for TM, it said.
"This would open a wider customer base for TM in the underserved areas, but without the expectation of low entry-level priced plans from the previous NFCP (National Fibre Connectivity Plan). The wider access would also present a strong case for TM to play a prominent role in the eventual deployment of 5G, given the heavy reliance on an extensive fibre network to support the backhaul infrastructure," Kenanga wrote.
As for competition, Kenanga expects it to get more intense in the mobile space — in addition to expectations of U Mobile's long-awaited listing in the coming quarters. But fixed-line players, "especially TM", are less susceptible to changes in the competitive landscape, it said.
"While ARPUs (average revenue per user) may see some minor swings from the MCO (Movement Control Order), overall long-term demand should remain sticky, particularly with the rise of homebound work arrangements. Granted, TM has the widest outreach amongst other available offerings in the market," it added.
As such, it has upgraded TM to 'outperform' from 'market perform'. And while it left its earnings forecast for TM's financial year ending Dec 31, 2020 (FY20) unchanged at RM814 million, it has raised its forecast FY21 earnings for TM by 3% to RM974 million.
"Though visibility of the allocation for the 5G spectrum is still lacking, we reiterate our previous thesis that even if TM is not awarded a piece of the spectrum, it is likely to have to lease its fibre footprint to serve the new network, therefore still playing an important role in 5G development," it added.
Last month, TM reported that its 2QFY20 net profit jumped 140.63% to RM274.75 million from RM114.18 million a year earlier, on lower operating and net finance cost, despite revenue slipping to RM2.59 billion from RM2.77 billion. The decline in revenue was due to its Internet service Streamyx's price adjustments and restricted economic activities during the MCO.
For 1HFY20, TM said cumulative net profit rose to RM427.27 million from RM422.46 million in 1HFY19, though revenue was down at RM5.15 billion versus RM5.55 billion previously.
TM shares settled two sen or 0.48% higher at RM4.15 today, giving it a market capitalisation of RM15.66 billion, after 3.16 million shares were done. The stock has risen 27% from its March low of RM3.26.