• 3Q18 core earnings surged 121% yoy due to strong growth in recurring revenues and better cost optimization.

• 9M18 core earnings rose 50.2% driven by double digit growth in data and data center recurring revenues. This largely ahead ours and consensus estimates at 86% and 85%

• Management guided that it will mitigate the short term margin compression in retail segment by increasing subscriber base with target more than 1m premises passed by in 2020

• Maintain BUY with an unchanged TP of RM9.70. We like its earnings stability from wholesale and enterprise segments while capturing the alpha growth in retail segment.

Doubling the earnings

3Q18 core earnings jumped 121% yoy on the back of strong growth in recurring revenue at 23% (3Q17:RM176m) and one-off IRU sales of RM19.4m. Its core EBITDA margin also increased 5.7ppt yoy to 41% (3Q17:36%). Meanwhile, core earnings fell -1.1% qoq on higher opex.

Beating the estimates

For 9M18, core earnings advanced 50.2% to RM135m. This is on the back of double digit growth of data (+25%) and data centre (+13%) albeit reduced in voice (-16%). Remarkably, core EBITDA margin expended to 42% (9M17:36.8%) as a result of improved overall cost efficiencies. Overall, the performance is largely ahead ours/consensus estimates at 86%/85% mainly attributed by unexpected one-off IRU sales of RM26.9m YTD. Hence, we raise our FY18F estimates by 10.9% to include IRU in core earnings (Table 2).

Mitigating earnings compression by enlarging subscriber base

Management guided that it will mitigate short term margin compression on retail segment by enlarging subscriber base. It is targeting to roll out more than 1m premises passed by fibre network by 2020. In order to capture the growth, it is looking to spend capex more aggressively to expand its network coverage with selective new economical penetration areas.

Maintain BUY with RM9.70 TP

Maintain BUY with a DCF-derived TP of RM9.70. We view its strong customer base in wholesale and enterprise segment will provide more stability on earnings backed by data and data centre demand growth. Meanwhile, its strong branding and reliability in retail segment would provide a competitive advantage.

Source: BIMB Securities Research - 28 Nov 2018