Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to today's conference. You are now participating in Telekom Malaysia Berhad First half quarter 2022 analyst briefing call. [Operator Instructions] I will now hand over this session to the conference leader, and the Encik Imri Mokhtar, Managing Director and Group Chief Executive Officer of Telekom Malaysia Berhad. Thank you, and over to you, sir.

All right. Thank you very much, [Foreign Language], and a very good morning to everyone. Welcome to TM's 2022 first half results briefing, and thank you all for attending the session. As usual, I will start first with some brief review of our 2022 first half performance and our group CFO, Encik Razidan, will then elaborate on the operational and financial details. I'll come back with -- later with some updates on our ESG efforts and at the end of the presentation with some concluding remarks before we proceed to the Q&A session. So let's dive straight in with our first half performance highlights as shown on the Slide 4. We are happy to report that we have recorded a solid performance in the first half of the year where from a top line perspective, the second quarter has been particularly stronger backed by higher revenue from all of our business segments across all of our product lines. Unifi's performance continued to improve from the higher net add fixed broadband subscribers, driven by aggressive sales, promotion and retention programs. As TM One has managed to arrest the quarterly revenue decline with growth as seen for business solutions together with ICT. TM Wholesale is seeing exciting data demand from both the domestic and international fronts. With regards to our CapEx investment for the first half of 2022 was at MYR 846 million or 14.1% of our total operating revenue. This is higher than the year-to-date last year as we are ramping up our growth investments as planned. This is well within our guidance of 14% to 18% business for 2022. The continuous cost optimization efforts have improved our cost efficiency and boosted our profitability, recording double-digit growth on all the 3 time horizons. I would like to point out that the PATAMI increase, registering a 32% increase on a year-to-date basis has allowed us to improve our dividend distribution. We are declaring an interim dividend of MYR 0.09 per share for financial year 2022, which is the highest first half interim dividend amount declared since the policy change in 2018, demonstrating our commitment to deliver shareholder value. We have also reintroduced the dividend reinvestment scheme or DRS applicable to the interim dividend, providing option and flexibility to our shareholders, enabling and providing the opportunity to participate into the group's current continuous growth momentum. I'll now have Razidan to take you through our financial and operational details.

Thank you, Encik. I will now take you through the key items for the first half 2022 as compared to the same period last year, which is the year-to-date comparison. Our operating revenue in the first half of 2022 recorded an increase of 7.3% at MYR 5.98 billion against the against MYR 5.57 billion in the same period last year. And as mentioned earlier, this was primarily driven by revenue growth from unifi and TM wholesale and balanced by a slight contraction space by TM One. Despite the slight increase of total cost, the revenue jump has boosted our EBIT by 29.2% from MYR 977.3 million in the first half of 2021 to MYR 1.26 billion in the current period. And on a relative basis, our cost efficiency ratio has also improved, and this is a testament to our ongoing cost optimization initiatives. With the higher EBIT and lower net finance cost, our PATAMI for first half 2022 has sought by 32% to MYR 717.9 million from MYR 544 million in the first half of 2021. Now let's take a look at some of the normalizing items for the first half 2022, and this is shown on the next slide. As shown excluding the FX or ForEx impact, the manpower optimization and the manpower optimization costs, our first half 2022 underlying EBIT is higher at MYR 1.32 billion. And the manpower optimization cost was mainly clocked in Q1 2022 and is expected to also be incurred in the next year. Now I would like to provide some color on our first half 2022 segmental and product performance, and you can see this from Slide #8 onwards. For unifi, we see the growth momentum, and this was maintained in the first half 2022 as we continue to see the home and SME customer base expanding Q-on-Q, resulting on a secured 10% -- 10.3% revenue growth on a year-on-year basis. Home ARPC or average revenue per customer continues to rise, while SME ARPC remained stable with attractive packages and device bundling to increase customer share of wallet. Convergence is also seemed to be steady with the number of customers increasing. As we continue to improve the customer usage experience with more features included in myunifi app, the adoption rate has improved by 10.9 percentage points year-on-year. All the above has contributed to the double-digit revenue jump of 10.5% recorded in the first half of 2022 at MYR 2.78 billion from the MYR 2.52 billion in the same period last year. From a fixed broadband standpoint, we continue to see our unifi subscribers and total fixed broadband customers rising year-on-year and Q-on-Q. Unifi fixed broadband ARPU has also slightly increased from the previous quarter, and this is due to the convergence bundling and value propositions. We are confident the demand for stable and reliable Internet for homes will remain strong with the current accelerated digital lifestyle of all Malaysians and remain very positive on the business outlook of unifi going forward. Moving on to TM One, you can see revenue was marginally down on a year-to-date basis by about 1.8% from MYR 1.68 billion in the first half of 2021 to MYR 1.65 billion in the first half of 2022. And the performance has been lower, and this is due to 2 things. One is the delayed project delivery from supply chain issues and customer site readiness; and secondly, the lower usage from work from home arrangements at many organizations in Malaysia. Nevertheless, this quarter TM One showed promising 7.7% revenue growth Q-on-Q and 4.1% in the same quarter last year. Several new notable digital business coalition. MOUs were also signed by TM One during the last quarter. And our infrastructure is ready to offer a variety of industry-specific solutions, including our green certified data centers and our class-leading hyperconnectivity, remain observant as global supply chain challenges and delays continue to impact the operations and subsequently delivery of several customer projects. Next slide is on Credence. Credence being TMs enterprise digital arm. They have begun to explore new digital opportunities while continue building capabilities with various partnerships and talent development being undertaken. And we are very excited to further grow the venture and empowering the digital transformation of Malaysian enterprise organizations as well as the public sector. TM Wholesale. TM Wholesale has recorded a compelling performance on all the 3 time intervals. On the year-on-year standpoint for quarter 2, 2022, the revenue has increased by 26.4% from MYR 585.3 million last year to MYR 739.9 million in the corresponding quarter this year. And this is underpinned by escalating domestic data demand from HSBA and higher international data mainly from the new IRUs. As at the first half of 2022, we have delivered cumulative of more than 4,500 4G and 5G backhaul site in supporting MyDIGITAL blueprint for enhanced digital inclusivity nationwide. We continue to support the industry attested by our highest record of HSBA installation, which peaked in June this year. TM Wholesale has also managed to secure new and important deals on the international front. Of note is a U.S.-based hyperscaler and with the North-Asia digital provider with very long-term wholesale data center solutions. Overall, TM Wholesale continued to expand the partnership ecosystem domestically and with the international players to grow the digital landscape in the country. Now let's go over the summary of revenue breakdown by product. For the first half 2022, all of our products have recorded positive performance. And this is spearheaded by Internet, leading the year-to-date revenue growth by 10% due to the consistent expansion of our fixed broadband customer base and the revenue has grown from MYR 1.97 billion last year to MYR 2.17 billion in the current year. Data has increased by 8% from MYR 1.55 billion as at end of June 2021 to MYR 1.67 billion at the end of June this year due to the higher domestic data and higher IRU deals at TM Wholesale. Voice was higher in the first half of this year by 5.9% at MYR 1.21 billion from MYR 1.14 billion in the same period -- for the same -- in the same period for the previous year due to the higher contribution from unifi and international voice at TM Wholesale. For Others, revenue has increased by 3.2% (sic) [ 2% ] on the year-to-date basis, and this is contributed by higher revenue from bespoke (sic) [ business ] solutions and ICT at TM One and from the infra sharing, colocation as well as CDN at TM Wholesale. Let's move on to the next slide. Okay, I'll now elaborate on our operating cost, which is shown on Slide #14. Even though the year-to-date total cost has slightly increased by 2.1% from MYR 4.65 billion to MYR 4.75 billion. The percentage of total cost to revenue to measure the real cost efficiency has improved from 83.5% in the first half of 2021 to 79.4% in the current year. And let's examine each cost line item and its related drivers. On direct cost, on a year-to-date basis, it was higher at the first half 2022, and this is due to 2 items, first one is higher amortized commission at unifi for the Internet and increased sales commission at TM One. And secondly, due to the increase in the IRU payment and increase in traffic minutes in line with the increase in international voice at TM Wholesale. The increase in direct cost was anticipated, and this is well in line with the revenue growth during the period. Manpower cost has now decreased in the first half 2022, and this is due to 2 things. One is the lower salary and salary-related costs from the lower headcount in the quarter. And this is actually a direct impact of the manpower optimization exercise and the early recognition of the associated costs in 2022. And secondly, there were declining allowances and overtime charges with lower manpower headcount. On other OpEx, this has also recorded an improvement on the year-to-date basis, and this is due to the ForEx impact on trade debtors, payables and our U.S. dollar deposits as well as the lower supply and material costs. Depreciation amortization slightly rose by 4% from the first half 2021 and stands at MYR 1.23 billion, and this was mainly due to the increase in amortization of intangible assets in the current period, mainly on the spectrum. Let's move on to group CapEx. This is on Slide 15. Our CapEx for first half 2022 was at 14.1% of revenue or MYR 846 million out of the amount that was spent 57% was for access, 25% was made for core network, and the balance 18% was made for support systems. The amount spent for the first half of 2022 is a 41.7% increase from the CapEx spending in the same period last year, indicating that our higher execution cadence and real focus on growth. For 2022, CapEx is primarily catering to the network modernization and the expansion of customer experience announced enhancements. Q2 2022 CapEx to revenue ratio percentage was at 15.7%, which is well within our guidance. Finally, let's look at our cash position. This is on Slide #16, yes. Cash and bank balances were lower at MYR 1.06 billion, and this is due to the higher CapEx spending in the first half of 2022. And despite the lower cash balance, we would like to highlight that cash flow from operating activities has increased in the current period from the same period last year, and we have sufficient liquid assets available. In addition, our healthy financial position also allows us to have ample and multiple financing options, including a very large debt headroom to support the business if required. And moving on to the group ratios. If you can observe that on an overall basis, this has also improved from the previous year, indicating very healthy financial spending for further growth. That's all for the financial and operating highlights. I'll now hand over the session back to Imri. Over to you, Imri.

Thanks, Razidan. TM acknowledges the importance of sustainability, ESG has been part of our DNA moving forward. And we progressively seek to improve on this front. Our road map for 2022, 2024 envisions TM to achieve a carbon emission reduction by 30% in 2024, while at the same time, aligning with national and global aspirations of carbon emission reduction by 45% in 2030 and net 0 emissions by 2050. For the second quarter, we continue with our various programs towards reducing this carbon emission with a 13% reduction achievement compared against our baseline. The notable achievement is powering up our 3 data centers in Klang Valley, the city data center as well as one down south is Iskandar Puteri with green energy. We have also embarked on a tree-planting initiative, where we will continue to contribute towards the Greening Malaysia campaign. As at first half 2022, we have planted more than 5,000 trees and we are aiming to plant many, many more by end of the year as part of this program. On the social front and specifically on the gender diversity, we do have a good women representation in the Board and senior management level at more than 30%, whilst overall, the TM workforce, we have 40% women representation. We're also working with our suppliers in ensuring the readiness towards the said ESG compliance. As at end of May 2022, we have secured the first level of ESG self-declaration responses from our mega or large and mid-tier suppliers, of which the validation program is currently ongoing. Under the governance pillar, we continue to uphold a zero-tolerance stance to all forms of corruption, driving improvement and disclosure on anti-corruption as well as other corporate governance agenda. Our effort in fighting corruption covers both our employees as well as our suppliers with an aim to uphold the highest level of integrity and values. We will continue to improve our sustainability efforts towards creating more value, better ESG rating and upholding our promise to our shareholders. And the final slide that we have for you today some key takeaways. The economic projection for the country has been optimistic, driven by strong rebound in the consumption and domestic demand. And the TM's overall business is gaining momentum from this progressive economic landscape as we continue to pursue growth from all our key customer segments in unifi, TM One and also with Credence as well as TM Wholesale. Unifi continues enhancing the convergence lifestyle for the home segment, driven by growth in fiber broadband with more attractive content that can be viewed at home as well as on the mobile phone. Concentrated focus is also extended to our SME business with the man long campaign of BelanjaDiSME to propel Malaysia's economic recovery. Together with the SME digitalization grant, entrepreneurs can benefit up to 50% savings for their digital connectivity and solutions. TM One as the sole Malaysian provider for the government's MyGovCloud has also invested in enhancing its data security capabilities. This shall mitigate the potential risk of attacks -- cyber attacks and guaranteed data sovereignty and privacy for the Malaysian Government Services, in line with TM's commitment to power a digital Malaysia. Credence was recently launched to deliver capabilities and tax skills for our large enterprise customers. Credence has a new cloud and digital services company which focuses on the business-to-business customers will play a role as the solutions partner to accelerate the digital transformation of large enterprise customers as well as our public sector customers. For the carrier to carrier or the C2C segment, TM Wholesale continues to offer a comprehensive suite of communication services and solutions for both our domestic and global telcos, including the large hyperscalers. The collaborative agreement was established with Globe Telecom in the Philippines, for example, that will enable the customers to enjoy greater gaming experience powered by TM Wholesale global connectivity and infrastructure. TM Wholesale had also signed an MOU with Telin, a subsidiary of Telkom Indonesia to explore strategic submarine cables network expansion as part of its commitment in providing reliable and robust connectivity across the region. TM is also supportive of the government's 5G deployment under the single wholesale network, the SWN model. 5G, we believe, will expand opportunities and growth areas across all the customer segments for TM, strengthening the group's convergence proposition and digital services, particularly smart solutions. Progressing further into the second half of 2022. TM will continue to focus on customer experience solutions and connectivity excellence from our core execution engine, our employees towards a more Digital Malaysia. Based on TM's current performance momentum, the Group is on track to achieve its 2022 market guidance. With that, I thank you very much for your attention, and we shall now move on to the Q&A session. Thank you.

[Operator Instructions] Your first question is from Mr. Ranjan Sharma from JPMorgan.

I have a couple of questions. I will take it one by one. If I look at cash flows. Cash received at MYR 2.37 billion. Despite the strong growth in revenue, this is amongst the lowest we have seen in the last 5 years. There's a gap of 23% between cash receipts and revenues being booked. If you can just explain what's behind that? I'll take my questions one by one.

Ranjan, can you repeat your question, please?

Yes, sure. So my question is, if I look at the cash receipts in the cash flow statements. The cash received from customers are at MYR 2.37 billion in the second quarter, that's amongst the lowest in the last 5 years at least, despite the strong growth in revenues. In fact, there is now a 23% gap between cash receipts from customers and the revenues being booked. If you can please share what is behind that? I'll take your questions one by one.

Yes. I think as far as cash flows are concerned, the cash flows, if you compare this year in terms of collections, customer collections have been very, very strong. Average collections of about MYR 750 million to MYR 800 million a month, and this average is definitely higher than the previous year and 20 -- even 2019, 2020 and 2021. So very, very strong collections. However, the impact, whatever you have mentioned just now relates to collections from TM One, and there's a correlation. If you look at the debt on the receivables on the balance sheet, there is an increase of about MYR 800 million. So these are contracts that have already been signed with many government agencies and just waiting for to be collected. They are not bad debt, but there are delayed payments, especially from the public sector. Hope that clarifies?

Okay. There is a 40% increase in receivables that you've seen year-to-date, that's all related to TM One?

Yes, but profit relates to government contracts that we will be collecting over the next quarter, third quarter and fourth quarter. It's coming, Ranjan.

Okay. Because [indiscernible] are negative despite the strong growth in revenues. My last question is on the CapEx. What are your expectations for this year, your cash CapEx?

Expectation of CapEx?

Yes.

Expectation. I mean we have guided the market on our market expectations is 14% to 18% of revenues, and we hope to be able to meet that.

The next question is from Mr. Luis from Citigroup.

Congrats on the results. I had 3 questions. The first one is regarding unifi. Although it's not a major drop, there is a sequential -- 3-quarter sequential reduction in unifi net adds. Is there any particular reason for this? Are you seeing potential market saturation, for example? Or is it because you're upselling more products which are essentially price here? Second question is if you could outline your medium to long-term prospects in the 5G space, both in terms of getting new wholesale contracts from DNB as well as your direct participation in the space? And the last question is more a housekeeping one. The MYR 70 million ForEx loss on borrowings for the quarter, is that a realized loss or an unrealized loss, and should we consider an exceptional item?

Luis, I'll take the first 2 questions on unifi as well as on 5G. And Razidan will take the third one. Yes. With regards to the unifi net adds. What we are seeing is there is still a continuous growth. And yes, it does seem to be a slightly down. But I think we do have to appreciate it is the shift of the macro environment, right, very much in 2021. There was a strong tailwind of everyone working from home and so forth. So what we are seeing the growth now is as per our expectations as the economy opens and things goes back -- the working arrangement goes back to its normal pre-pandemic levels, right? Everyone's working back to the office and so forth. So it is something that is tracking to our expectations, which it provides a strong base of this -- of broadband customer growth for our convergence proposition and drive. On the second question that you have with regards to 5G. As we are all very much aware, TM, our interest is on several levels. The first one, we are a preferred partner in terms of the fiber backhaul and that is something that we are aggressively rolling out, not just for the 5G but also for the 4G backhaul for the industry. Secondly, in terms of the equity participation. At TM, we have registered our interest to be part of that. And we are working through the necessary agreements that's required together with DNB to that effect. And thirdly, it's -- as an access seeker to the 5G network. We are working towards the wholesale agreement. And from there, I think coming out from it is really the exciting prospect that we see of further strengthening our convergence proposition at unifi in terms of providing the fixed mobile convergence proposition and towards increasing our average revenue per customer, which very much today is very much anchored on the fixed broadband, content and some mobile and also devices as well. So with the launch of 5G, once we've gotten all the necessary agreements with DNB, it does present an exciting prospect for unifi and also for our TM One. TM One for the business segment, in particular, not just in terms of providing the enhanced connectivity beyond this fix with 5G, but also the solutions, particularly the smart solutions that it would enable us to deliver for the various industry verticals. So that would be what would be the outlook for us moving forward with regards to mobile, in particularly 5G. And on the third question, I'll just hand it over to Razidan.

Luis, the ForEx is unrealized, and this is a result of the movement in the U.S. dollar-ringgit exchange rate. And it has been -- and ringgit has depreciated, as you know. And therefore, if you translate that against the 2 big loans that we have on our balance sheet, which is the [ Yankees ] and the Tulip Maple loans. That movement, you can see if we go through the Bursa Malaysia report, you will see that disclosure there on ForEx, MYR 81.4 million on the face of the P&L. And there's also a second disclosure on the next page in comprehensive income because part of the [ Yankees ] are hedged. So there is that disclosure there, and this unrealized ForEx on our foreign loans -- U.S. dollar loans.

The next question is from Mr. Foong from CGS-CIMB.

And congrats on the very good set of results. Three questions from me. Firstly, I wanted to ask about TM One. So we're seeing some resumption in year-on-year growth in the second quarter, which is very good. I wanted to ask what are you seeing so far into the third quarter? And do you think the rebound in 2Q will persist? Or was it more timing related where you had some one-off lumpy items? That's question number one. Secondly, on the cost side, other OpEx is down 12% year-on-year. And Razidan, you mentioned earlier on that it's due to 2 factors. But I wanted to find out how much of that was driven by the FX gain on international trade settlement, if you can sort of share with us the number in ringgit terms? And you also mentioned lower supplies and materials. Is that just related to lower customer projects? Or were there cost efficiencies there? And if so, can you elaborate on the initiatives that were undertaken by TM? And thirdly, TM have used the cash generated, right, to pay down debt early in the past. Can you talk about plans going forward and give us an idea of the potential savings there? And the balance sheet is actually already very healthy. Does TM have any targeted levels for net debt-to-EBITDA that you can share with us? Yes, those are my 3 questions.

All right. I'll take the first one with regards to TM One. We do expect this momentum to continue for TM One in the second half of the Q3 and Q4. So I have to say with regards to some of the onetime revenue or one-off from customer projects, we're still facing as mentioned those challenges here from the global supply chain. But we are seeing stability when it comes to the recurring revenue, which is more sustainable for us. And beyond that, as you know, TM One is very much on the -- our current core connectivity plans and some smart solutions. We're also expecting the second half the momentum to pick up from Credence, our new digital arm business in terms of supporting particularly our large enterprises in terms of the cloud migration and the digital transformation push. So I think it is -- it will be an interesting second half for our Enterprise and Public Sector segment. And for the second and the third questions, I'll pass it to my sidekick, Razidan.

Foong, do you have that slide on underlying EBIT just now that we showed?

Yes.

You asked about FX gain. I'm not going to tell you what the figure is.

I see for the first half of MYR 58.4 million. So that entire amount is actually booked in -- under other OpEx is it?

Yes.

Okay. Understood, understood. Okay. And on the lower supplies and materials that you also mentioned as a factor driving other OpEx down, right? Can you elaborate a little bit on that as well? Whether that's just due to lower customer projects or you actually see cost efficiency there as well?

I I think these are network supplies and materials, yes. And your question is?