• TimedotCom (TDC) announced a weak set of results in which 3Q17 earnings fell 21% qoq and 49% yoy on higher operating expense as well as effective tax rate and the absence of IRUs.

• Over 9M17, core earnings fell 21%, trailing ours and consensus estimates at only 51-55%. The shortfall was mainly on higher than-expected effective tax rate and weak revenues.

• We pare down FY17E earnings by 7.5% to reflect higher-than expected effective tax rate and lower revenue growth due to lower IRUs executed in FY17E.

• Downgrade to HOLD with lower TP of RM9.80 (from RM11.00). While TDC’s fundamentals remain strong, we believe its growth potential have been largely priced in while margin might come under pressure in the near term as competition picks up.

Cost pressures setting in

TDC’s 3Q17 core earnings fell 10% qoq and 49% yoy to RM28m due to higher subscriber acquisition costs at the retail segment. This was worsened by higher effective tax rate and the absence of IRUs in 3Q17. This saw 9M17 core earnings drop 21% to RM117m, to be only 55% and 51% of ours and consensus expectations respectively.

Slower revenue on IRU absence

TDC’s 3Q17 revenue rose 4% yoy but fell 1% qoq to RM203m. The sluggish performance was mainly due to the absence of one-off IRU revenues (2Q17: RM6.4m, 3Q16: RM15.7m). On a lighter note, non IRU sales rose 13% yoy and 2% qoq led by data and retail. However, this also led to operating expense (opex) rising on higher subscriber acquisition costs as retail subscriber base has yet to hit critical mass.

Key highlights from call

Management noted that IRU sales in 2016 was fairly strong, making it hard to match in 2017. The Asia-Africa-Europe-1 (AAE-1) subsea cable system was only deemed partially Ready-for-Service at end Jun 2017 with remaining Cambodia, Myanmar, Singapore and Hong Kong Branch to be completed by end 2017.

No change in our forecast

We lower FY17 estimates by 7.5% to reflect higher opex while we trimmed FY18/19 estimates by 1.8%/1.7% as we expect IRU sales to improve in FY18 with more branches of AAE-1 completing.

Downgrade to HOLD

Downgrade to HOLD with a lower DCF-derived TP of RM9.80 (from RM11.00). While we believe its long term outlook remains intact as the global demand for data underpins bandwidth demand, near term risks from rising competition could dilute earnings.

Source: BIMB Securities Research - 27 Nov 2017