Results

1Q14 revenue of RM2.6bn was translated into a core net profit of RM207.3m on the back of sustained margin. This is within expectations, accounting for 23% of HLIB and consensus full year forecasts, respectively. Deviation

In line.

Dividend

None (1Q13: none).

Highlights

Turnover expanded healthily by 8.1% yoy as internet, data and other revenues grew by 12.7%, 3.5% and 30.4%, respectively, while voice was relatively flat. Sequentially, sales weakened by 12.1% qoq affected by seasonality with all product segments declined qoq (voice, -4.0% / data, -11.8% / others, -38.5%) except for internet segment with 2.4% growth.

UniFi base added at a slower pace of 18k subs to 653k subs in 1Q14 due to market maturity coupled with the usual database cleanup / force churn. This implied a 43% take-up on the back of 1.5m premise-pass over 105 exchanges. 90% are on UniFi VIP5 with the remaining on VIP10 and VIP20. ARPU expanded by RM3 qoq to RM188, partly implying good take-up rate of HyppTV with high value packages.

Streamyx base stagnated since 1Q13 with ~RM1.57 subs at consistent mix of residential to business ratio of 82:18. However, ARPU continue to strengthen, +RM1 qoq and +RM6 yoy to RM86 as more than 43% are on >4Mbps connection. 8Mbps bundle subscriptions gained >40% qoq.

Stayed tight-lipped on HSBB 2 as it is still under discussion with government. Rollout will be prioritized for state capitals.

Marketing expenses eased to 3% of sales (1Q13: 3.3% and 4Q13: 4.2%) in 1Q14 due to lower charges and commission. However, TM shared that the run rate should normalized to 3.5% of sales for FY14.

Effective tax rate was guided to revert back to statutory rate of 25% in the absence of broadband tax incentive going forward.

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

HOLD, TP: RM6.05

Positives – Earnings uplift mainly from HSBB, ICT-BPO and further cash management potential, near monopoly of fixed telco market in Malaysia.

Negatives – Unattractive pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

Reiterate HOLD with unchanged DDM-derived fair value of RM6.05 using WACC of 5.7% and TG of 1%.

Source: Hong Leong Investment Bank Research - 29 May 2014