Results

• After adjustment of accelerated depreciation, 1H16 revenue of RM5.9bn was translated into a much anticipated core net profit of RM482m, accounting for 50% and 55% of HLIB and consensus full year estimates, respectively.

Deviation

• Within expectations.

Dividend

• Declared an interim single-tier dividend of 9.3 sen (2Q15: 9.5 sen) per share which goes ex on 15 Sept.

Highlights

• YoY: Top line growth of 7.2% was mainly fueled by Data, followed by other revenues and Internet, which was more than sufficient to offset voice’s decline. However, core net profit post accelerated depreciation and FOREX adjustments, fell by 8% mainly due to higher interest expense.

• QoQ: Revenue strengthened by 6.7% as all products grew outpacing the contraction in voice. But, core net profit was lower by 8% as direct, marketing and maintenance costs rose.

• Internet remained the largest revenue contributor at 30%. Its growth trajectory (+8.9% yoy and +1.2% qoq) is more than sufficient to offset voice’s contractionary trend (-6.3% yoy and -3.2% qoq).

• This was attributable to UniFi with 23k net adds in 2Q16 elevating total base to 900k, representing 43% adoption rate of on the back of 2.08m ports. ARPU strengthened to RM194 as circa 68% of the base is on packages of 10Mbps and above after the launch of all new UniFi Advance packages.

• While ARPU was stable at RM89, Streamyx base fell by 22k qoq to 1.47m as majority upgraded to UniFi. Out of the total broadband base, 60% of them are now on packages of 4Mbps and above.

• With 900 LTE sites now, webe’s full rollout will take 3 years till FY19 with majority (70-80%) will be completed by FY17. It continues to weigh on TM’s earnings with 2Q16 LBIT of RM166.6m on the back of RM52.8m revenue.

• Out of the balance of RM100m worth 1.1k WiMAX sites, RM48m will be written off in 2H16.

Catalyst

• Earnings uplift from HSBB and ICT-BPO.

• LTE node fiberization.

Risks

• Appreciation of USD, regulatory risks, irrational competition and acceleration of global bandwidth price erosion.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM6.89

• Positives – Earnings uplift mainly from HSBB, ICT-BPO, near monopoly of fixed telco market in Malaysia.

• Negatives – Unattractive pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

Reiterate HOLD with unchanged DDM-derived TP of RM6.89 based on unchanged WACC of 5.8% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 1 Sep 2016