Results 

Signs  of  fruitful  transformation  as  operational  data  showing some  reversals  especially  in  prepaid  segment,  whereby  YTD core  net  profit  of RM1.44bn is within expectations ,  accounting for  74.1%  and  73.6%  of  HLIB  and  consensus’  full  year forecast,  respectively.

Deviations

• In line.

Dividend 

• Declared  3 rd interim  single-tier  tax -exempt  dividend  of  8  sen per  share  (3Q13:  8sen),  ex -date  on  26 th Nov   2014.  YTD dividend  amounted  to  24  sen  per  share  (9M13:  24  sen),  in line with expectations   as per guidance.
• Distribution beyond  FY14 will dependent  on free  cash flow .

Highlights

Excluding  the  low-margin  outright  device  sales  and  hubbing business,  service  revenue  was  flat  qoq  breaking  the  6 consecutive  quarterly  declines since 1Q13.

Prepaid  gained  momentum  led  by  #Hotlink  as  sub  base registered  a  first  time  net  add  to  9.1m  after  5  continuous quarterly  attrition along with ARPU expansion to RM35 (+RM1 qoq and +RM2 yoy).

Internet  remains  the  main  growth  driver  (+4.1%  qoq)  for mobile  revenue,  cushioning  its cannibalization effects on SMS (-10.2% qoq)  and  WBB’s slowdown  (-8.1% qoq).

Stable contribution from  U Mobile at RM51m in 3Q14.

>5.7k  HSPA+  sites  with  >4.7k  capable  of  42Mbps. Modernized  network  now  covers  73%  population  while  LTE coverage  increased  3-ppt  to  21%  supporting  959k  4G  device owners.

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  wit h  Astro,  network infrastructure outsourcing  and workforce  rationalization.
• Stronger  than expected home fibre  internet take up rate.

Risks

• Government,  regulatory,  industry and execution risks.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM6.74

• 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

• Upgrade  from  TRADING  SELL  to  HOLD  after  raising  our  fair value  by  13.3%  from  RM5.95 to RM6.74 as we rolled over our valuation to FY16.
• In  view  of  the  change  of  dividend  policy  ahead,  we  switched our  valuation methodology  from  DDM  (WACC  of  6.3%  and TG of 1.0%) to DCF (WACC of 5.6% and TG  of 0%).

Source: Hong Leong Investment Bank Research - 14 Nov 2014