• TDC posted solid 2Q18 core earnings of RM74m, grew 47% yoy and 11% qoq underpinned by strong growth in recurring revenues.

• 1H18 core earnings were slightly above ours and consensus estimates at 57% attributed by robust growth in retail business and good cost containment.

• No changes to forecasts. While strong performance across all divisions was encouraging, we believe retail business may see some weakness in 2H from rising competition.

• Maintain BUY with an unchanged TP of RM9.70. We believe its long-term outlook is intact amidst growing data demand and limited impact from new competition in fixed broadband space.

Solid growth

2Q18 core earnings grew 47% yoy and 11% qoq at RM74m underpinned by strong growth in recurring revenues (ie. data and data centre units). Despite the absence of IRU sales in 2Q18 (2Q17: RM6.4m), revenue grew 4.4% qoq and 16.6% yoy while recurring revenue hit a new high of RM187m, topping 1Q18 (RM178m). Meanwhile, opex growth was contained at 2% qoq and 3% yoy resulting in EBITDA margin expanding to 41.2% (1Q18: 37.5%, 2Q17: 30.7%).

Robust retail segment driving strong 1H18 growth

For 1H18, core earnings rose 28.8% to RM135m. This was on the back of the strong EBITDA growth (+29.3%), underpinned by robust retail business. Similarly, opex rose 3.3% aided by lower 3rd party network costs and interconnect voice, in tandem with declining voice.

Against our estimates

Overall, 1H18 earnings were ahead of our estimates at 57%. We make no changes to our estimates as we expect some weakness in 2H18 amidst growing competition within the fixed broadband space. Still, we believe it could mitigate the impact in the medium term leveraging on its strong branding and economies of scale to mitigate the impact from new competition.

Reiterate BUY with RM9.70 TP

Maintain BUY with a DCF-derived TP of RM9.70 which assumes 7.4% WACC and 3% long-term growth rate. We view its long-term outlook remains intact as growing demand for data are expected to underpin bandwidth demand while its strong branding could see limited impact from new competition in the fixed broadband space.

Source: BIMB Securities Research - 29 Aug 2018