Results

9M13 revenue of RM7.6bn was translated into a stellar core net profit of RM748.8m on the back of superior margin, accounted for 89% and 87% of HLIB and consensus full-year estimates respectively.

However, we considered the results to be largely in line as we expect effective tax rate to normalize to statutory rate of 25% in 4Q13 as broadband tax incentive expired in 3Q13.

Moreover, higher costs will be incurred in 4Q13 in relation to:

1. Marketing (dealer commission) as UniFi take up rate resume momentum after the seasonally weak 3Q13.

2. Maintenance with more customer / government projects.

3. Content as it will come into full impact.

Deviation

Largely in line.

Dividend

None (3Q12: none) as TM practices semiannual distribution. YTD dividend amounted to 9.8 sen (9M12: 9.8 sen).

Highlights

Data and Internet remained as main revenue drivers which expanded 17% and 14% yoy respectively in 3Q13, propelling 9M13 to gain in similar magnitude of 17% and 13% yoy respectively.

Unsurprisingly, voice product gave back the surplus in 2Q13, registering decline of 4.7% qoq and 1.4% yoy to RM892m in the absence of boost from global / wholesale minutes as well as usage in mass market. Domestically, churn has resulted in fixed line subscriber base shrinking by -0.8% qoq and 4.0% yoy to 3.77m.

As expected, 3Q13 UniFi net add was at a slower pace of 30k subs qoq due to seasonality (Ramadhan celebration). Nonetheless, total base ended at 607k as of 3Q13 and continue to climb towards 620k currently on the back of 1.46m premise-pass, yielding 43.5% penetration. ARPU expanded by RM3 qoq to RM183, partly implying good takeup rate of HyppTV with high value packages. 16% of UniFi subs purchase premium / VOD channels.

Streamyx ARPU also expanded RM1 qoq to RM83 as more than 75% of subscriptions are at 1Mbps or higher. 4 / 8Mbps take up increased 12.5% qoq.

HyppTV service for SME makes debut by securing 2 hotel / hospitality entertainment contracts.

Stayed mum on HSBB phase 2 as discussion is still ongoing with government. This will be a continuation of phase 1 under the public-private partnership (PPP) structure to double the coverage to 2.8m premise-pass.

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 - 29 Nov 2013