Investment Highlights

• We maintain our HOLD call on Telekom Malaysia (TM) with a higher DCF-based fair value of RM4.25/share (from an earlier RM4.08/share) based on a WACC of 7.3% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 5x.

• We raise our FY19F–FY21F earnings forecasts by 4%–10% on reduced operating cost assumptions as TM’s 1HFY19 normalised net profit of RM523mil came in above expectations, making up 59% of our FY19F earnings and 60% of consensus.

• As a comparison, first-half normalised earnings accounted for 41%–51% of the previous 3 years. As in FY18, the group did not declare any interim dividend payment as expected with management maintaining its guidance of 40%–60% of PATAMI.

• The earnings outperformance stemmed from the low operating costs which continued from 1QFY19, with 1HFY19 operating costs declining by 16% YoY to RM3.6bil. This was driven by the group’s transformative Performance Improvement Programme (PIP), an ongoing initiative that has been carried out since mid- 2018. PIP has led to cost optimisation in content/sponsorship costs, contract renegotiations, marketing, business procurement and Unifi mobile’s domestic roaming arrangements.

• Management highlighted that there were no significant 1HFY19 write-backs for cost provisions incurred last year while maintaining guidance for low-to-mid single-digit revenue decline and higher YoY FY19F EBIT. However, the group’s 1HFY19 capex decreased by 37% YoY to RM450mil, accounting for only 8% of revenue vs management’s guidance of 18%. This implies that capex is expected to accelerate in 2HFY19.

• TM’s 1HFY19 net profit surged 2x YoY with operating costs falling by RM674mil (-16% YoY), supported by lower direct cost (-18% YoY) and other opex (-30% YoY).

• On a QoQ comparison, TM’s 2QFY19 normalised net profit decreased by 24% to RM227mil mainly due to depreciation surging by 25% and operating costs by 5%, partly offset by the halving of tax charge and higher Unifi-mobile driven positive minority charge.

• However, 2QFY19 revenue trajectory remains unexciting, delivering a flattish performance QoQ while contracting by 6% YoY to RM2.8bil due to declines in the voice (-5% YoY) and internet (-10% YoY) segments. Unifi’s 2QFY19 average revenue per user (ARPU) fell by RM2/month QoQ and RM15/month YoY to RM177/month.

• Against the backdrop of TM upgrading Streamyx users by 2021, broadband subscribers continue to contract by 2% QoQ and 6% YoY to 2.2mil. Streamyx users dropped by 6% QoQ and 24% YoY to 823K in favour of other fixed and wireless broadband providers, which could only be partly offset by new Unifi customers that rose 1% QoQ and 10% YoY to 1.3mil.

• The stock currently trades at a fair FY20F EV/EBITDA of 5x with a decent dividend yield of 3%.

Source: AmInvest Research - 29 Aug 2019