Results

Revenue of RM2.4bn was translated into higher-thanexpected core net profit of RM234.0m, accounting for 30% of HLIB and 29% of consensus full-year estimates respectively.

Deviation

Lower-than-expected other operating income and effective tax rate compared to previous guidance of 28%. Currently, TM expects full-year tax rate to be 10% due to broadband tax incentives which will only expire in Sept 2013.

Dividend

None (1Q12: None).

Highlights

Voice revenue continue to decline 7.4% yoy and 3.2% qoq due to lower global / wholesale minutes as well as usage in mass market which is attributable to holidays resulting in less business days in the quarter.

Internet revenue continued to grow solidly on the back of enlarged broadband subscriber base which also stimulated the 75% growth in content IPTV revenue.

To date, UniFi has 1.39m premise-passed under its coverage with more than 560k subs (~40.3% take-up). However, UniFi blended ARPU fell by RM2 qoq to RM178 due to promotions to re-contract subscribers. Streamyx net ARPU was lifted by RM1 to RM82 as more than 72% of subs are with more than 1Mbps package.

Although the qoq fall of 9.4% which may due to seasonality, data revenue also advanced by 13.8% yoy contributed by new installation and upgrade from corporate and wholesale segments including 4k additional circuits, HSBB ports / access and Ethernet.

Other revenue declined by 11.4% yoy and 49.5% qoq in the absence of MER999, USP OPEX claim, government and customer project revenues which are lumpy in nature.

Comment

Expect margin compression ahead given that TM will drive top line growth which currently lags behind KPI (1Q13: +1.7% vs. KPI: +6.0%) at the expense of profitability which may involve higher advertising and promotion expenses (more discounts). TM has head room to do so as EBIT advanced ahead of KPI (1Q13: +9.6% vs. KPI: +3.0%).

Catalyst

• Earnings uplift from HSBB and ICT-BPO.
• Improving ROE with more efficient capital structure.

Risks

• Regulatory risks, irrational competition, acceleration of global bandwidth price erosion and being a dumb pipe.

Forecasts

• Aligned forecasts based on deviations mentioned above resulting in FY13-15 EPS upward revision by 7.0%, 1.9% and 0.8% respectively.

Rating

HOLD, TP: RM5.65

• Positives – Earnings uplift mainly from HSBB, ICT-BPO and further cash management potential, near monopoly of fixed telco market in Malaysia.
• Negatives – Unattractive wholesale pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

• The upward revision was not significant as our DDM-derived TP remains largely unchanged at RM5.65 on the back of 5.5% WACC and TG of 0%. We maintain HOLD call on the stock.

Source: Hong Leong Investment Bank Research - 31 May 2013