Results

• 1H16 turnover of RM3.3bn was translated into a much anticipated core net profit of RM0.8bn, accounting for 50.9% of HLIB but shy of street’s estimate by 6.6%, if annualized.

Deviations

• None.

Dividends

• Declared 2nd interim tax exempt (single-tier) dividend of 5.4 sen per share (2Q15: 5.9 sen), representing 100% payout, which goes ex on 29 Aug.

• YTD dividend amounted to 10.5 sen per share (1H15: 12.0 sen) is within expectation. Highest yielder among peers.

Highlights

• Respectable postpaid gain (+6% qoq and +10% yoy) despite heightened rivalry in the segment. Postpaid base recorded 3rd consecutive quarterly additions to reach 1.95m subs along with ARPU improvement of RM2 qoq to RM82.

• Net adds originated from positive churn as well as upgraders from prepaid thanks to robust LTE network and greater value in service bundling. As a result, postpaid internet subs increased to 1.6m (82% of total postpaid) generating strong internet revenue of RM239m, up 16% qoq and 27% yoy.

• We view pre-to-postpaid migration positively as this will lead to improved stickiness and ARPU uplift over the long run.

• Prepaid remains lackluster impacted by rotational churn and postpaid dilution which led to lower contribution (-2.8% qoq and -6.7% yoy).

• Reviving prepaid growth by pricing up new data products and recalibration of IDD pricing has eventually led to stronger EBITDA and margin in 2Q16.

• 27% of data traffic now transits via LTE network compared to 6% a year ago, implying more room for improvement to deliver data services with higher network efficiency.

• Revised CAPEX guidance slightly lower to 13%-14% of service revenue (RM825-889m) vs. previous’ RM900m.

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 - 12 Jul 2016