Results

• Core net profit of RM1.4bn disappointed, accounting for 68% and 70% of HLIB and consensus’ full year estimates, respectively.

Deviations

• Mainly due to lower-than-expected prepaid voice ARPU and data revenue due to confluence of aggressive data pricing, IDD price war and RM depreciation.

Dividends

• Declared 3rd interim tax exempt (single-tier) dividend of 5.1 sen per share (3Q14: 6.3 sen), representing 100% payout, which goes ex on 6 Nov 2015. YTD dividend amounted to 17.1 sen per share (1H14: 18.9 sen).

Highlights

• Maiden GST boost was helpless; the challenging operating environment has led to third consecutive sequential profit slides. We believe these impacts are short term and its rapid 4G deployment would confer an edge over rival.

• Excluding device sales, service revenue came in flat yoy and qoq where internet growth sufficiently offset the declines in voice and SMS. YTD service revenue grew 1.2%.

• While postpaid performance remains healthy, prepaid base shrunk for the first time since 2Q14 by 145k. As prepaid ARPU and revenue were constant qoq, this may imply that those attritions are of low value subscribers.

• 4G subscribers more than doubled yoy to 1.5m or 13.2% of subscriber base supported by 50% coverage. Ambitious but on track to deliver another 3,000 sqkm or additional 1.5k sites by year end.

• LTE-A in testing phase to combine 20MHz of 2.6GHz and 10MHz of 1.8GHz via carrier aggregation which potentially offer up to 112.5Mbps bandwidth.

• Still no clarity on the mechanism of the newly announced prepaid GST in Budget 2016.

• 2015 guidance remains unchanged: low to mid-single digit service revenue growth, sustaining EBITDA margin (~45%) and CAPEX (RM900m) similar to FY14 level.

Risks

• Irrational competition, difficulty in refarming 1800MHz spectrum for LTE, unable to monetize data revenue, government and regulatory risks.

Forecasts

• Trimmed assumptions based on latest operating data which led to downward revision of FY15-17 EPS by 8.3%, 10.1% and 12.3%, respectively.

Rating

BUY , TP: RM6.22

Positives

• mobile internet growth, margin improvements through collaborations/sharing, capital management via business trust structure, recoup prepaid tax via GST.

Negatives

• Intense competition from U Mobile, MVNOs and OTT players.

Valuation

• Maintain BUY despite a lower fair value of RM6.22 (from RM6.30), reflecting the earnings cut. TP is derived based on WACC of 6.0% and TG of 2.0%.

Source: Hong Leong Investment Bank Research - 27 Oct 2015