• 2Q18 core earnings fell 25% yoy while 1H18 was down 40% to RM261m, trailing ours and consensus estimates respectively at 42% and 40%.

• TM ONE performed poorly on lower voice and data sales which were exacerbated by higher opex and revenue collection issues that led to the rise in bad debts.

• No dividends were declared in face of its challenging operating environment.

• HOLD with RM3.60 DCF-derived TP. While we see earnings risk are largely priced in, near term risk remains inherent. Sell on strength.

The ONE that got away

While pressure from the government to lower broadband prices have been the main trigger for its sell-down in recent months, TM’s dismal earnings have come under pressure owing mainly to poor performance of TM ONE – its enterprise division. Amidst higher input costs and falling voice revenues, it also faced revenue collection issues which led to the surge in bad debts during the quarter.

unifi remains uninspiring

Meanwhile, unifi incurred higher network costs and depreciation charge amidst investments for unifi mobile. The overall broadband subscriber base was also tepid at just over 2.3 million albeit unifi subs continue to strengthen to slightly over 1.2 million. We believe there could be some respite in new subs as the new broadband plans are rolled out in coming quarters.

Product roll outs underway

Product upgrades are underway with pre-registration for the new plans already opened. Unifi basic, initially for B40 households, would be made available for the entire market in Sept amidst strong demand during the pre-registration period. Still, management anticipates the demand for its standard plan to remain robust, leveraging on its triple play offering and data cap feature (ie. 60GB/mth) for unifi basic.

Trailing expectations

1H18 core earnings fell 40% to RM261m with TM ONE being the main cause. The effective tax rate also rose amidst earnings drag from unifi mobile. We make no changes to our estimates for now as we expect some respite in subs with product rollout in 2H18.

HOLD with DCF-derived RM3.60 TP

Our HOLD call and DCF-derived TP of RM3.60 implies an FY18F PE of 23.8x. We see near term outlook remains challenging. Sell on strength.

Source: BIMB Securities Research - 30 Aug 2018