Results

Weaker-than-expected 2Q14 sales resulted in a disappointing YTD core net profit of RM988m, only accounting for 46.2% of HLIB’s full year forecast, but this is within street’s estimates.

One-off adjustments considered for comparison include:

a. 2Q13: accelerated depreciation of RM40m and associated tax effect of RM10m.

b. 1Q14: accelerated depreciation of RM39m and associated tax effect of RM10m.

c. 2Q14: accelerated depreciation of RM60m, reversal for contract obligation of RM22m and their associated tax effect of RM9m.

Deviations

Overoptimistic on prepaid net adds and non-service revenues (devices and hubbing).

Dividend

Declared 2nd interim single-tier tax-exempt dividend of 8 sen per share, ex-date on 27th Aug 2014.

Highlights

2Q14 turnover marked the fifth consecutive quarterly decline (-1.7% qoq and -9.2% yoy) as Maxis scaled down the lowmargin outright device sales and hubbing business.

Internet remains the only growth driver (+1.5% qoq) for mobile revenue, cushioning its cannibalization effects on voice (- 0.7% qoq), SMS (-8.1% qoq) and WBB’s slowdown (-10% qoq).

The run rate of prepaid churn is concerning although it has already guided that the high attrition rate due to Hotlink Youth Club SIM expiry and legacy plans were already towards tail end in the previous quarter.

Stable contribution from U Mobile at RM50m in 2Q14.

FY14 guidance: service revenue to be lower than FY13 with EBITDA margin of 49%-50%. CAPEX remains at RM1.1bn.

Catalysts

Higher smartphone penetration boosting data ARPU, synergistic product bundling with Astro, network infrastructure outsourcing and workforce rationalization.

Stronger than expected home fibre internet take up rate.

Risks

Government, regulatory, industry and execution risks.

Forecasts

Adjusted forecasts base on deviations above as well as updating the latest debt level. As a result, FY14-16 EPS were lowered by 9.3%, 10.1% and 10.1%, respectively.

Rating

TRADING SELL, TP: RM5.95

Positives - New business potential in converged services, strong postpaid ARPUs (still the highest in the industry) and smartphone penetration.

Negatives - Initially low margin fibre services would depress profitability and weakening ARPUs.

Valuation

Reiterate TRADING SELL after cutting our DDM-derived TP by 4.0% from RM6.20 to RM5.95 using WACC of 6.3% (vs. previous’ 6.7% due to changes in debt to capital ratio) while TG of 1% is retained.

Source: Hong Leong Investment Bank Research- 23 Jul 2014