Results

1H3 revenue of RM5bn was translated into a stellar core net profit of RM479m on the back of superior margin, accounted for 57% of HLIB and consensus full-year estimates.

However, we would argue that the results are largely in line as we expect effective tax rate to normalize to 10% as per guidance (1H13: 5.6%) given that broadband tax incentive will expire in Sept 2013.

Furthermore, we expect margin compression ahead given that TM will drive top line growth which currently lags behind KPI (1H13: +4.8% 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 (1H13: +9.9% vs. KPI: +3.0%).

Deviation

Largely in line.

Dividend

As expected, declared an interim single-tier dividend of 9.8 sen (2Q12: 9.8 sen) per share with ex-date on 10th Sept.

Highlights

QoQ: Excluding flat Internet revenue, all products registered growth (see Figure #5) including voice (+6.6%) which was a positive surprise thanks to higher global / wholesale minutes as well as usage in mass market.

Data and Internet remained as main revenue drivers which expanded 20.7% and 9.6% yoy respectively in 2Q13 which propelled 1H13 to register double-digit growths of 17.2% and 12.0% yoy respectively.

UniFi: 2Q13 net add was 45k subs, elevating total base to reach 577k with majority (83.9%) residential subscriptions. ARPU expanded by RM2 qoq to RM180, partly implying good take-up rate of HyppTV. However, net add seems to be slowing down with total net add of only 13k for the 2 months in 3Q13 as total base swelled to 590k. TM reasoned this on the back of seasonality (Ramadhan celebration) where slowness was also observed in FY12 and we are not overly concern as UniFi matures (41.3% take-up rate).

Streamyx: 1k attrition was partly due to UniFi upgrade while ARPU also expanded RM2 qoq to RM82 as more than 73% of subscriptions are at 1Mbps or higher.

USD exposure: USD465m and USD300m bonds which are maturing in 2014 and 2025 respectively where 46% hedged.

Renewed Collective Agreement with Union resulted in RM29m impact on manpower cost while full year impact is guided at RM60m.

Catalyst

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

Risks

Appreciation of USD, regulatory risks, irrational competition and acceleration of global bandwidth price erosion.

Forecasts

Unchanged.

Rating

BUY, TP: RM5.82

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

Reiterate our BUY rating on TM with unchanged DDMderived TP of RM5.82 using WACC of 5.4% and TG of 0%.

Source: Hong Leong Investment Bank Research - 30 Aug 2013