• 4Q18 core earnings declined 61% qoq and 53% yoy on higher depreciation and tax expense.
• Meanwhile, 2018 core earnings fell 27% on lower data revenue. We believe the MSAP impact was mitigated by higher subscriber base for unifi albeit at lower ARPU.
• Management guided for low-mid single digit revenue decline for 2019 but improvements in EBIT as capex for HSBB2 is ending.
• We raised our forecast by 23-30% for 2019F-20F earnings on better cost efficiency and cash management which translates to lower net interest expense.
• HOLD with a higher DCF-derived TP of RM3.20 on lower WACC and moderated capex. We believe its flexibility to deploy capex will strengthen cash flow and boost growth prospects.

Weaker 4Q18 core earnings

4Q18 core earnings declined by 61% qoq and 53% yoy mainly on higher depreciation cost and tax expense. Meanwhile, 2018 core earnings fell 27% on lower data segment amidst MSAP implementation since end 3Q18. Overall, it was within our estimates at 103%. A 2sen DPS was declared, inline with revised dividend policy of 40-60% payout ratio.

MSAP impact mitigated by higher unifi subscriber base

Data revenue for 2018 fell -8.7% on MSAP implementation but the impact was mitigated by higher unifi subs of 1.3 million (+172k), resulting in higher internet revenue. However, we expect further ARPU dilution given lower pricing levels enjoyed by the new subs. As such, management guided for a low-mid single digit decline in 2019 revenue.

Moderated capex and higher EBIT for 2019 KPI

Management also expects capex to moderate in coming years as HSBB2 rollout comes to an end. It noted that future capex would likely be more targeted, focusing on convergence and costumer experience. It expects 2019 EBIT to improve on better cost efficiency. We raised our earnings for 2019F/20F by 23%/30% on its initiative to revamp its cost structure and better cash management owing to lower capex requirements.

Maintain HOLD with higher DCF-derived TP of RM3.20

We maintain HOLD with higher RM3.20 (from RM2.35) DCF-derived TP as we lowered WACC to 7.9% (from 9.0%) and capex assumption. We believe its flexibility to deploy capex will give more capital muscle to achieve its convergence strategy. This should also give TM more room to raise dividend payout if needed.

Source: BIMB Securities Research - 27 Feb 2019