Results

• 9M16 turnover of RM4.9bn was translated into a much anticipated core net profit of RM1.2bn, accounting for 78.9% and 73.4% of HLIB and street’s FY estimates, respectively.

Deviations

• None.

Dividends

• Declared 3rd interim tax exempt (single-tier) dividend of 5.6 sen per share (3Q15: 5.1 sen), representing 100% payout, which goes ex on 29 Nov. YTD dividend amounted to 16.1 sen per share (9M15: 17.1 sen) is within expectation.

Highlights

• QoQ: While top line dip was largely caused by non-core device and other revenues, bottom line strengthened 9.4% thanks to effective cost rationalizations in materials and IDD related traffic charges. Based on 100% payout, dividend has been increasing for the past 4 consecutive quarters.

• YoY: Despite lower devices sales, the weakness in revenue is attributable to prepaid voice revenue as a result of price competition, including the IDD segment. Earnings also fell in tandem after adjustments for one-off items.

• Continue to gain market share in postpaid segment with 2m subs, of which 83% are mobile internet (MI) users. Entry level postpaid plans and affordable 4G bundles have led to favorable acquisitions and prepaid to postpaid conversions. Although this explains the ARPU moderation to RM80 (-RM2 qoq), we are not overly concern as those were short term promotions and see great potential of those users trading up their plans as consumption increases.

• While prepaid base shrunk persistently since 2Q16, both service revenue and ARPU held up steadily, implying those attritions were low value subs. It has also stabilized the yoy decline on prepaid and IDD price with stronger focus on sustainable growth and away from irrational IDD price war.

Risks

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

Forecasts

• Forecasts are updated based on the latest guidance and operating parameters. In turn, this has led to higher forecast for FY16-17 EPS by 7.9% and 1.8%, respectively.

Rating

BUY, TP: RM5.70

• 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.

Valuation

• Reiterate BUY although we have adjusted our TP marginally lower by 1.4% from RM5.78 to RM5.70 as we roll forward our valuation to FY17. Fair value is derived based on DCF valuation with WACC of 5.0% (formerly 4.6%) and TG of 0.5% (previously 0%).

Source: Hong Leong Investment Bank Research - 20 Oct 2016