• 1Q18 core earnings fell 46% yoy and 48% qoq to RM115m on lower revenue, higher opex and a drag from webe which led to the surge in effective tax rate.

• Revenue notably weakened particularly for TM ONE and TM Global due to lower government jobs and the absence of IRUs.

• Overall, 1Q18 core earnings were only 14% and 13% of ours and consensus estimates respectively. We cut FY18-20F forecasts by 27-33% to reflect the poor performance.

• Downgrade to HOLD with a reduced TP of RM3.90. While we like its convergence aspiration that differentiates TM from its peers, we believe near term earnings risks are inherent.

Pains from investments for the future

TM’s results disappointed as revenue weakened across most customer clusters, especially at TM One and TM Global. This was worsened by the higher opex rose amidst LTE investments for unifi mobile. The effective tax rate also surged owing to earnings drag from webe and absence of any deferred tax assets to cushion the blow.

Net debt on the rise

Along with increased investments, cashpile eroded to RM1.5bn from RM1.7bn at end 2017. While debt remains stable at RM8bn, the weak performance has pushed net debt-to-EBITDA ratio to 2.1x and halved ROE to 5.5% from 11.1% at end Dec 2017.

Paring down expectations

Management noted increasing proportion of subs ‘converged’ to triple and/or quad services from single/double services. This clearly indicate TM’s plan to retain subs which could be costly. In the wake of its poor 1Q18 performance, we pare down our FY18-20F estimates by 27-33% as we expect revenue to be under pressure from competition and the government’s initiative to lower broadband fees. We also expect opex to remain elevated in the near to medium term.

Downgrade to HOLD with a lower TP of RM3.90

Product innovation remains key for TM but we believe this would also see higher investments which may risk protracted payback period. We downgrade to HOLD (from Buy) with lower DCF-derived TP of RM3.90 (from RM6.75) which implies an FY18F PE of 23.8x.

Source: BIMB Securities Research - 23 May 2018