This article first appeared in The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023

It is a constant balancing act for Telekom Malaysia Bhd, which supports nation building and advances the country’s digital transformation agenda as a government-linked corporation (GLC) while also needing to deliver good returns as a public-listed company (PLC).

For the financial year ended Dec 31, 2022 (FY2022), at least, its top line reached an all-time high since 2008, the year it floated its mobile and international operations under Axiata Group Bhd to focus on delivering high-speed broadband services. Net profit rose 27.7% to RM1.14 billion year on year.

That helped TM chalk up a 21.8% risk-weighted three-year profit after tax (PAT) compound annual growth rate between FY2019 and FY2022 — beating sectoral peers to clinch The Edge Billion Ringgit Club (BRC) award for highest growth in PAT over three years in the telecommunication and media sector. TM won the same BRC award last year.

TM’s RM1.14 billion PAT in FY2022 came on the back of a robust revenue growth of 5% to RM12.1 billion. With effective cost management, its earnings before interest and tax (EBIT) increased 15% year on year to RM2.07 billion, while core earnings jumped 35% y-o-y to RM1.56 billion, despite a higher effective tax rate due to the Prosperity Tax.

Things are getting trickier this year, though. The direction from Minister of Communications and Digital Fahmi Fadzil that internet prices had to be reduced by September was one of the challenges in TM’s way to hit another record high in its earnings. The recent revision on the Mandatory Standards on Access Pricing (MSAP) would also have an impact on the company’s profitability.

In the first half of financial year 2023 (1HFY2023), however, TM’s net profit is still up 25.2% y-o-y to RM898.8 million, from RM717.9 million, despite an increase in operational and depreciation costs. Its net profit for 2QFY2023 ended June 30 jumped 50.4% y-o-y to RM568.7 million, owing mainly to the recognition of tax credits from unutilised tax losses.

Nonetheless, there is no doubt that TM’s operating landscape is getting more challenging.

Its average revenue per user (ARPU) for the fixed broadband Unifi business was flat in 2QFY2023, resulting in the segment — the group’s largest — reporting flat growth during the quarter, despite growth in the number of subscribers.

Meanwhile, TM One continues to be affected by higher costs and lower margins, as its customers, including governments, are demanding better contract value. TM One’s revenue fell 11.4% y-o-y in 2QFY2023 to RM732 million, while its Ebit fell 22.67% y-o-y to RM205.1 million.

Still, management remains optimistic on prospects for FY2023. For the year, it has guided for a stable y-o-y revenue growth, Ebit of RM1.8 billion to RM2 billion and between 18% and 20% capital expenditure intensity.

“The Ebit guidance appears conservative, in our view, and possibly reflects higher mobile-related costs and some degree of MSAP impact,” states Maybank Investment Bank Research in an Aug 28 report.

“We raise our FY2023/24/25 net profit forecasts by 21%/23%/14% respectively, as we incorporate the tax credits (to be recognised over two to 2½ years) and lower Ebit,” the research firm states.

If FY2023 proves to be another record year for TM, its shareholders will be smiling all the way to the bank. Management is committed to distributing yearly dividends of between 40% and 60% of its net profit every year, to ensure growth for long-term shareholder value. In FY2022, TM declared 16.5 sen per share in dividends, with a total payout of RM627.5 million.

At the time of writing, 18 of 21 analysts tracking TM have either a “buy” or “strong buy” call, indicating confidence in potential returns to investors. The consensus target price is RM6.24, with the highest being RM7.15.

“We continue to like TM on account of positive tailwinds in the digital space as economies recover; the enhanced network coverage nationwide boosting internet demand from both the public and business sectors; [and] competitive offerings, with added 5G availability. [TM’s] subscriber base [is also] expected to improve further, given the expected lower broadband prices coming from the revised MSAP,” Kenanga Research wrote in a report dated Aug 28.

Commenting on the outlook for 2023 in its 2022 annual report, TM had informed shareholders about the likelihood of an increase in the cost of doing business, but said it “remains confident in our ability to navigate challenges by focusing on greater efficiency and productivity”.

TM’s evolution from the country’s incumbent telecommunications company (telco) to a technology company (techco) is being spearheaded by new leaders, with a change in its chairman and group managing director and CEO from Aug 1 this year.

To borrow the words of TM’s former chairman Tan Sri Mohammed Azlan Hashim — who retired on July 31 this year following a two-year term, and was succeeded by Financial Reporting Foundation chairman Datuk Zainal Abidin Putih — TM’s “ability to evolve and adapt has been instrumental in our success thus far and we remain committed to exploring new opportunities and staying ahead of the curve”.

Amar Huzaimi Md Deris, who succeeded Datuk Imri Mokhtar as managing director and group CEO, said in a statement in July that Imri “has set the right path for TM”, noting that its 2021 to 2023 transformation programme had strengthened the group’s foundation and allowed it to better pursue new growth areas.

In an Aug 25 statement following the release of 2QFY2022 numbers, Amar, who headed TM’s domestic and global wholesale business previously, said the group “expects to face a more challenging marketplace but remains confident in our overall positive financial performance”.

The group, he says, will continue strengthening its core business to be commercially sustainable while contributing to the nation’s growth.

“TM is excited by the huge potential of fixed, mobile and lifestyle convergence in the digital market, as well as digital infrastructure and solutions for MSME (micro, small and medium enterprises), enterprise and government sectors, while pursuing opportunities with international partners, including hyperscalers,” Amar said in the statement, reiterating TM’s commitment to continuously invest in its network to enable the nation’s progress towards a Digital Malaysia.

“TM will continue to collaborate closely with the government to serve as the nation’s trusted partner to grow Malaysia’s overall connectivity and digital ecosystem, including 5G.”

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