Telekom Malaysia: Consider Staff Cost Pressures And Data Center Growth Potential (MYTEF)

I continue to assign a Hold investment rating to Telekom Malaysia Berhad (OTCPK:MYTEF) [T:MK] stock. There is a lack of short-term catalysts pertaining to financial performance improvement, as staff cost pressures will most probably weigh on Telekom Malaysia’s earnings. On the other hand, MYTEF has a substantial long-term earnings growth driver in the form of its data center business. But its new data center joint venture with Singapore telecommunications firm Singtel’s Nxera data center entity will only deliver significant earnings in a few years’ time. Therefore, it is appropriate to stay Neutral on Telekom Malaysia for now.

My previous June 11, 2020 write-up touched on Telekom Malaysia’s financial results and business performance during the COVID-19 period. On its corporate website, Telekom Malaysia calls itself “Malaysia’s leading integrated” telecommunications company providing “solutions in fixed (telephony and broadband), mobility, content, WiFi, Cloud, Data Centre, cybersecurity, IoT (Internet of Things) and smart services.”

Telekom Malaysia’s shares are traded on the Over-The-Counter market and Malaysia’s stock exchange known as Bursa Malaysia. The company’s OTC shares have limited trading liquidity, while its shares listed on Bursa Malaysia are fairly liquid. As a reference, the three-month mean daily trading value for Telekom Malaysia’s Malaysia-listed shares was $15 million as per S&P Capital IQ data. Readers can deal in the company’s Malaysia-listed shares with international brokerage firms such as Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Staff Cost Pressures Could Hurt Bottom Line In The Short Term

Telekom Malaysia suffered from an earnings miss in the most recent quarter, and elevated staff costs might continue to be a drag on the company’s bottom line in the near term.

The company’s earnings per share or EPS decreased by -7% QoQ and -31% YoY to RM 0.103 in the second quarter of 2024 as indicated in its results announcement. This was -5% below the sell-side analysts’ consensus bottom line estimate of RM 0.108 per share according to S&P Capital IQ data.

As disclosed in its latest quarterly earnings presentation slides, MYTEF’s costs-to-sales ratio rose by +3.1 percentage points YoY and +0.6 percentage points QoQ to 81.1% in Q2 2024. Staff costs are the company’s largest expense item representing about 30% of its total costs for the recent quarter. Telekom Malaysia’s staff costs went up by +23% YoY and +8% QoQ to RM 704 million for Q2 2024. It is reasonable to conclude that the significant increase in staff costs was the major factor contributing to MYTEF’s bottom line miss in the second quarter of the current year.

Telekom Malaysia explained at its Q2 2024 analyst call (transcript sourced from S&P Capital IQ) that the growth in the company’s staff costs for the recent quarter was driven by “higher staff remuneration from the group-wide salary adjustment undertaken in September” 2023. Looking ahead, MYTEF guided for “another (upward) salary adjustment” in Q3 2024 as per its latest quarterly results briefing comments.

In my opinion, Telekom Malaysia and other Malaysian businesses are facing substantial staff cost pressures due to two key reasons.

One factor is that the Malaysian government has recently announced an increase in wages for the civil service, which might compel companies like Telekom Malaysia to do likewise.

An August 16, 2024, Bloomberg article highlighted that “a majority of mid-level civil servant professionals will see their wages rise by 15%, while top civil servants will receive a 7% bump” as part of “the first revision to the remuneration program in more than a decade.”

The other factor is that Malaysian companies such as Telekom Malaysia are cautious about losing their staff to businesses operating in Singapore, a neighboring country of Malaysia.

Singapore media outlet Channel NewsAsia or CNA published a commentary piece in February 2024 citing the Malaysian government’s comments regarding “a brain drain of skilled workers leaving Malaysia” to work in Singapore.

In other words, Telekom Malaysia is competing for talent with both the Malaysian civil service and Singapore companies, so it is easy to understand why it is necessary for MYTEF to implement wage hikes.

For full-year FY 2024, the sell-side analysts are forecasting that MYTEF will register a positive +1.0% top line expansion as per S&P Capital IQ’s consensus data. But the consensus financial forecasts indicate that Telekom Malaysia’s EBITDA is projected to decline by -0.5% in the current fiscal year on the back of a -60 basis points EBITDA margin contraction.

In summary, Telekom Malaysia could witness weaker operating profitability this year as a result of staff cost pressures. The stock is currently trading at 6.8 times consensus next twelve months’ EV/EBITDA which is not that far from its historical 10-year mean EV/EBITDA multiple of 6.3 times based on S&P Capital IQ. Telekom Malaysia’s lackluster FY 2024 EBITDA outlook will limit the stock’s valuation re-rating potential in the near future.

Data Center Business Boasts Favorable Growth Prospects For The Mid-To-Long Term

In my October 2019 initiation article for MYTEF, I indicated that Telekom Malaysia has three major segments, namely “Unifi (broadband arm), TM One (business-to-business arm serving the enterprise and public sectors) and TM Global (business arm offering domestic wholesale connectivity to the local service providers).”

The company derived 48%, 26%, and 25% of its 1H 2024 top line from the Unifi, TM Global, and TM One segments, respectively. Other businesses accounted for the remaining 1% of MYTEF’s 2024 interim revenue. Telekom Malaysia’s data center business, which falls under the TM Global segment, has the greatest potential for growth.

Research firm DC Byte has referred to Malaysian city Johor as “the fastest growing (data center) market” in ASEAN (Association of Southeast Asian Nations) in its 2024 Global Data Center Index report. In its July 2024 blog post, data center solutions provider EdgeConneX cited Research and Markets’ estimates indicating that the size of the Malaysian data center sector could expand by +72% to $2.25 billion in the 2022-2028 time frame. In contrast, the ASEAN region’s data market is forecasted to grow at a relatively more modest +47% during the same time period.

In a nutshell, the Malaysian data center industry is expected to grow rapidly in absolute terms and much faster than the ASEAN region as a whole.

Telekom Malaysia has taken steps to capitalize on this sector’s growth opportunities. In its Q2 2024 earnings release, MYTEF disclosed its key data center business growth initiative, “the development of a mega data center in Johor in partnership with Singtel’s Nxera.” This joint venture with Singtel’s Nxera could be a major growth engine for the long run. This new data center will be operational in 2026 with an initial capacity of 64 megawatts and a maximum potential capacity of 200 megawatts.

MYTEF doesn’t reveal specific financial metrics relating to the company’s data center business which forms part of the TM Global segment as mentioned above. But Malaysian research firm PublicInvest’s analysis suggests that MYTEF’s annual net income could be +24% higher in FY 2027 all else equal, when this new data center under the Telekom Malaysia-Nxera joint venture is up and running at optimal utilization levels. PublicInvest’s research also indicates that MYTEF’s 51% interest in this data center joint venture might be worth around RM 8.1 billion or close to a third of the stock’s current market capitalization.

In summary, MYTEF has recently entered into a joint venture with a Singapore telecommunications company’s data center business arm (Nxera) to establish a big data center in Johor to capitalize on Malaysia’s data center growth opportunities.

Conclusion

Telekom Malaysia’s FY 2024 EBITDA growth prospects are uninspiring, as the company’s near-term operating profitability will likely be impacted by staff cost pressures. But the company’s long-term outlook is bright, considering that its new data center joint venture with Singtel’s Nxera could be a major earnings contributor by FY 2027.

Moreover, the stock’s current EV/EBITDA is close to (within 10%) of its 10-year mean, which implies that the company’s shares are at a fair valuation based on a historical comparison. Also, MYTEF’s Southeast Asian telecommunications peers are also trading at similar high-single digit EV/EBITDA ratios. Specifically, StarHub Ltd (OTCPK:SRHBF) (OTCPK:SRHBY) [CC3:SP], True Corporation Public Company Limited (OTCPK:TCPFF) [TRUE:TB], and PT Sarana Menara Nusantara Tbk. (OTCPK:SMNUF) [TOWR:IJ] are also now valued by the market at EV/EBITDA multiples in the 6.0x – 8.3x range as per S&P Capital IQ data.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.