Results

• After one-off adjustments, 9M16 core net profit of RM1.4bn accounted for circa 73-75% of HLIB and street’s full year estimates, respectively.

Deviations

• None.

Dividend

• Declared 3rd interim single-tier tax-exempt dividend of 5.0 sen (3Q15: 5.0 sen) per share as expected. Ex-date on 28 Nov.

• YTD amounted to 15 sen per share, on par with 9M15.

Highlights

• QoQ: Service revenue grew 2.8% after two quarters of consecutive decline as prepaid gained 6.6% offsetting the fall in postpaid by 1.5%. Including one-off USP income (RM34m), core earnings strengthened by 20.2%.

• YoY: Flattish top line as the short fall in service revenue was cushioned by other revenues. However, bottom line improved in the absence of accelerated depreciation and boosted by one-off USP income.

• Prepaid: 3Q16 sales gained mainly driven by solid ARPU of RM41 (+RM3 qoq). Sub base continued to shrink, down to 9.1m (8m RGS) but it highlighted that RGS traction improved towards end of 3Q16. Newly launched Hotlink FAST attracted high mobile internet (MI) users leading to a penetration rate of 55%, up 3-ppt qoq. Stable contribution from foreign worker segment.

• Postpaid: After adding 200k in 3Q16, MaxisONE plan has 1.5m subs yielding stable ARPU of RM129, down RM14 qoq signaling user down trading after the automatic data quota upgrade in 2Q16. This has also impacted overall ARPU which fell by RM2 qoq to RM100.

• Home fibre gained 6k subs in 3Q16 to a total of 139k.

• U Mobile’s domestic roaming contribution rose 5.7% qoq to RM92m, implying significant traffic growth traction.

• MI penetration stagnated at circa 70% level but both prepaid and postpaid data usage continued to trend up topping 2.6GB/mth and 3.7GB/mth, respectively. There are 4.1m LTE device users consuming 4.4GB data per month, on average.

Catalysts

• Higher smartphone penetration and LTE coverage boosting data ARPU, network infrastructure outsourcing.

• Continuous momentum of #Hotlink and MaxisOne Plan.

Risks

• Regulatory, competitive and execution risks.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM6.40

• Largest telco in terms of revenue market share with quality of service as a key differentiator to peers driving leadership in data adoption. Focus will be on service impact due to lesser spectrum allocations and spectrum fee impact on dividend.

Valuation

• Reiterate HOLD with unchanged DCF-derived fair value of RM6.40 based on WACC of 5.4% and TG of 0%.

Source: Hong Leong Investment Bank Research - 20 Oct 2016