Results

• 1Q16 turnover of RM1.7bn was translated into a much anticipated core net profit of RM399m, accounting for 25.4% of HLIB but shy of street’s estimate by 11%.

Deviations

• None.

Dividends

• Declared 1st interim tax exempt (single-tier) dividend of 5.1 sen per share (1Q15: 6.1 sen), representing 100% payout, which goes ex on 25 May.

Highlights

• By standing firm with its FY16 guidance after the unexciting 1Q16 results, this may imply that the worst is over. Despite the seasonal softness coupled with intense competition, it witnessed narrower yoy and qoq declines even in a post - GST environment.

• Excluding device sales, 1Q16 service revenue actually fell at a much slower rate of 1.7% qoq and -1.8% yoy as expansion in data was not sufficient to offset voice’s decline.

• Second consecutive quarters of net adds, boosting total base to 12.3m, after adding 62k and 149k of postpaid and prepaid subscribers, respectively. Retaining these rotational churners will be crucial going forward.

• Postpaid performance was outstanding with record growth of 3.1% qoq and 6.9% yoy thanks to stronger data network and new plans. ARPU was resilient at RM80. Out of the larger 1.9m base, internet adoption was at 80.3%, up from 78.4% in 4Q15.

• Prepaid was a disappointment where additional subs was not sufficient to offset the sharp fall in ARPU (from RM38 in 4Q15 to RM35 in 1Q16), causing sales to contract 3.6% qoq and 5.0% yoy to RM1.1bn.

• Focus will be on prepaid to postpaid conversion

• LTE availability reached more than 73% coupled with LTE-A with carrier aggregation covering 33% population in key markets.

Risks

• Regulatory risks, irrational competition, exorbitant spectrum fee and unable to monetize data revenue.

Forecasts

• Unchanged.

Rating

BUY , TP: RM5.78

Positives

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

Negatives

• Intense competition from U Mobile/MVNOs and cannibalization by OTT players.

Valuation

• Reiterate BUY on the back of unchanged DCF-derived TP of RM5.78 based on WACC of 4.6% and TG of 0%.
• Still our top pick for the sector due to its under-leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Source: Hong Leong Investment Bank Research - 25 Apr 2016