- We maintain our HOLD call on TM but raise our fair value to RM7.40/share (10% discount to DCF) from RM6.20/share as we roll-over our valuations to FY15F and given the earnings revisions in this report.

- TM’s 3Q14 core net profit of RM192mil brought 9M14 core earnings to RM591mil. The results missed estimates accounting for 67% of our and 66% of consensus forecast.

- Earnings fell 29% YoY. EBITDA margins contracted while tax rates had normalised (due to the absence of last mile tax incentive).

- Revenues were flat as TM underwent a clean-up of delinquent accounts in 3Q14. This led to a massive churn in Streamyx subs, while Streamyx ARPU dived to RM81 (3Q13: RM83). Voice revenue was indirectly impacted. On a normalised basis, voice revenue is down 3.4% QoQ while Streamyx ARPU was up to RM86 (2Q14: RM85).

- Positively, Unifi net adds reaccelerated to 9K/month while ARPU continued to rise to RM189 due to aggressive marketing (focused on selling HyppTV in return for higher speed) and upselling from Streamyx. ARPUs were also supported by better uptake of paid HyppTV channels.

- Staff cost were lower QoQ due to an inflated base in 2Q14 and a reversal of bonus provisions in 3Q14. The Skim Mesra is expected to be completed by end FY14 – this helps to weed out older staff, but there is uncertainty whether there will be a recognition of one-off costs in FY15F.

- We trim FY14F by 8% to reflect TM’s clean-up exercise, but raise FY15F-16F to factor in the absence of accelerated depreciation, higher net adds and ARPU for Unifi. Gestation for 4G LTE (network rollout expected in FY15) is a risk to group earnings over the next 12 months, but an extensive fibre network coupled with P1’s existing sites (60% pop coverage) could tone down capex. Migration of existing Wimax subs could lower initial takeup risk, but the initial focus on large screen means P1’s target market would be smaller than mobile peers.

- TM is trading close to historical average and has always traded at a discount to mobile peers. The move into mobile space could be a re-rating catalyst, but we prefer to remain conservative for now pending the consolidation of P1 next quarter, which will unveil the extent of losses TM has to stomach in the near term, and therefore determine whether the downward earnings revision cycle for TM has bottomed.

Source: AmeSecurities