Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD
Research House: AMMB

Telekom Malaysia Bhd
(Aug 24, RM3.52)
Maintain buy at RM3.55 with unchanged fair value of RM3.90: Telekom Malaysia (TM) made a net profit of RM124.4 million (3.5 sen per share) in 2Q2010, against RM497 million for our full-year estimate.

Stripping off translation gain of RM18.1 million and other one-off gains of RM3.2 million, net income would have been RM104.2 million.

We consider this largely within our estimate. We are looking at 2H2010 to register only slightly better numbers due to a more robust Unifi subscriber base.

Revenue for the quarter of RM2.15 billion ' up 0.4% quarter-on-quarter (q-o-q) and +1% year-on-year (y-o-y) ' was largely from a push by better contributions from non-voice sales; in line with expansion in its Streamyx customer base.

Streamyx saw a net addition of 56,000 customers during the quarter against 54,000 in 1Q2010. Internet, which includes Unifi and Streamyx, expanded 1.9% q-o-q and 7.2% y-o-y. Non-voice continues to be in the driving seat, with an improved revenue contribution from 54% to 56% currently. More importantly, operating margin from non-voice revenue is higher than that of voice, which should push earnings in subsequent quarters.

Ebitda margin eased against 1Q2010 to 31.6% (from 33.2%) due to higher cost of supplies and materials, marketing expenses and other operating costs, mainly related to the faster rollout Unifi. We expect this to scale back in 2H2010 on the back of better cost management in Unifi rollout.

We believe 2Q2010 has not taken into account the full-blown impact of Unifi take-up ' as it was only launched at the end of 1Q2010. On this, we shall see better performance in 2H2010, when Unifi take-up rate is expected to increase to at least 20,000 by year-end. there are currently about 12,000 subscribers to Unifi, implying a monthly net addition of about 3,000 per month from the 18 newly launched areas in the current quarter.

The catalyst for the take-up rate would be the earlier than expected rollout which is to cover at least 750,000 premises passed before the year end. This compares with about 500,000 premises passed currently.

We maintain our preference for TM on its unique buffer dividend policy. We continue to rate TM as a 'buy' with fair value of RM3.90 per share on a discounted-case-flow-based valuation (terminal growth 1.5% and weighted-average-cost-of-capital 9.7%).

On dividend yield comparison, the company offers a slightly higher yield of 5.2% against 5% in DiGi.Com Bhd and 4.8% in Maxis Bhd. ' AmResearch, Aug 24


This article appeared in The Edge Financial Daily, August 25 2010.