Partnership With Nxera And Singtel Will Deliver AI-Ready Data Center In Johor

Key Takeaways

• Strategic partnerships and infrastructure expansion aim to boost service offerings and revenue growth amid rising data demand and connectivity trends.
  
• Cost optimization and strong financials support strategic investments, suggesting potential for improved margins and higher shareholder returns long-term.
  
• Structural challenges in Voice revenue and competitive pressure in broadband could hinder Telekom Malaysia's profitability and perceived financial stability.

Catalysts

Engages in the establishment, maintenance, and provision of telecommunications and related services in Malaysia and internationally.

• Telekom Malaysia's strategic partnership with Nxera and Singtel to develop a sustainable, AI-ready mega data center in Johor is expected to enhance its data center service offerings, driving potential revenue growth from the burgeoning data center and connectivity demand.
  
• Continuous upgrades of 4G and 5G infrastructure and expansion of fiber connectivity, especially in underserved areas like Sarawak, highlight efforts to improve service quality and inclusivity, likely positively impacting future earnings through increased digital adoption.
  
• The expansion of international and domestic data services, as well as successful IRU deals with global carriers, strengthen TM Global’s market position and are anticipated to bolster revenue growth in international connectivity and data service segments.
  
• Telekom Malaysia's focus on cost optimization, evidenced by reduced operating and direct costs alongside digital transformation initiatives, aims to improve net margins through enhanced operational efficiencies and reduced expenditure.
  
• The company's improved financial ratios, reduction in debt, and strong cash flow position signify capacity for strategic investments and possible higher shareholder returns, potentially boosting earnings and ROE in the long term.

Telekom Malaysia Berhad Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Telekom Malaysia Berhad's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 15.6% in 3 years time.
• Analysts expect earnings to reach MYR 2.1 billion (and earnings per share of MYR 0.54) by about June 2029, up from MYR 1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR2.6 billion in earnings, and the most bearish expecting MYR1.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.9x on those 2029 earnings, up from 17.4x today. This future PE is greater than the current PE for the MY Telecom industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Risks

• The increase in manpower cost due to higher separation costs and staff remuneration adjustments may impact net margins if not complemented by proportional revenue growth.
  
• The unprofitability in the Voice segment and ongoing decline in international Voice revenue suggest structural challenges that could dampen revenue growth.
  
• The intensely competitive fixed broadband market may constrain Unifi's ability to increase ARPU, potentially affecting revenue and profitability.
  
• Dependency on one-off settlements such as with MYTV for revenue recognition can create irregular earnings and affect perceived financial stability.
  
• Potential competition in the data center interconnectivity market, along with challenges in the international market such as the DNB 5G issues, could undermine expected revenue increases from these strategic initiatives.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of MYR8.11 for Telekom Malaysia Berhad based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR9.6, and the most bearish reporting a price target of just MYR4.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be MYR13.4 billion, earnings will come to MYR2.1 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of MYR7.39, the analyst price target of MYR8.11 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.