• 1Q19 core EBIT pre MFRS 16 surged 75% qoq and 117% yoy on overall cost optimization and lower depreciation cost, resulting in core earnings to be ahead of estimates at 28%

• Surprisingly, Unifi’s EBIT continue to grow despite lower revenue amidst ARPU dilution and shrinking subscriber base.

• We raised our 2019F/20F earnings and DPS by 52%/45% and 56% to reflect new cost structure and its dividend policy.

• BUY with a higher DCF-derived TP of RM4.00 after we revised earnings. We expect improved dividend payout in tandem with earnings recovery and better regulatory clarity.

Beat estimates

1Q19 core EBIT pre MFRS 16 surged 75% qoq and 117% yoy on overall cost optimization and lower depreciation cost. On cost optimization, direct cost saw the most reduction to make up only 25% of revenue (1Q18: 29.7%, 4Q18: 33.1%) due to lower mobile network cost. We note similar trends observed with other telcos i.e Digi, Maxis and Celcom. It also optimized cost through contract renegotiation of its content and optimising marketing spend. On depreciation cost, it dipped 21% qoq and 9% yoy after it impaired legacy network back in 2018. Overall, 1Q19 core earnings were running ahead of our estimates at 28.2%

Unifi continue to grow

Although Unifi segment is experiencing ARPU dilution and shrinking subs for its fixed line segment, EBIT rose 49% qoq on the back of cost optimization. Notably, losses from Webe narrowed significantly based on lower MI charge off rate (-85% yoy, -86% qoq). We expect the Unifi segment would continue to underpin growth on the back of lower mobile network cost and growing convergence penetration.

Raised forecast to reflect cost optimization

We raise our FY19F/FY20F core earnings by 52%/45% to reflect the new cost structure. We believe the cost improvements are structural and further incremental gains could be seen in coming quarters under the Performance Improvement Programme (PIP). We also expect its convergence strategy would continue to grow driven by expanding Unifi mobile networks and flexible capex rollout.

Upgrade BUY with higher DCF-derived TP of RM4.00

We upgrade our call to Buy (from Hold) with higher DCF-derived TP of RM4.00 (from RM3.20). This values the stock at 11.3x PE 2019F before easing to 11.2X PE 2020F. We believe the strong earnings recovery would sustain following structural improvements in cost and better clarity in regulatory policies. These should lead to higher dividends based on its payout policy of 40%-60% of reported PATAMI.

Source: BIMB Securities Research - 31 May 2019