Results

• 9M16 revenue of RM8.8bn returned a disappointing core net profit of RM578m, accounting for 67-68% of HLIB and consensus full year estimates, respectively.

Deviation

• Higher-than-expected cost base especially marketing and supplies & materials costs.

Dividend

• None (3Q15: none).

Highlights

• QoQ: Despite internet’s 2% growth, overall revenue fell by 4% impacted by the dismay showing by all other products. However, leaner cost structure and smaller accelerated depreciation associated to webe lifted core net profit by 24%.

• YoY: Top line was flattish as growths in internet and other revenues were offset by declines from voice and data. Core earnings eventually fell 9% impacted by larger cost base and accelerated depreciation from webe.

• YTD: Revenue expanded 3% thanks to higher contributions from all products which more than sufficient to offset the fall in voice. Adjusting for FOREX, core net profit actually fell by 11% attributable to accelerated depreciation associated to webe as migration to LTE gained pace.

• UniFi added 21k subs in 3Q16 elevating total base to 921k, representing 44% adoption rate of on the back of circa 2.1m ports. ARPU strengthened to RM197 as 75% of the base is on packages of 10Mbps and above after the launch of all new UniFi Advance packages. This is also attributable to higher purchase of premium IPTV content (1.9m purchases).

• While ARPU was stable at RM90, Streamyx base fell by 17k qoq to 1.45m. Out of the total broadband base, 62% of them are now on packages of 4Mbps and above.

• webe has more than 1.5k LTE sites as end of 3Q16. Prepaid product will only make debut in 2H17.

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

• Tweak projections based on deviations above and update operating parameters. In turn, this has led to -6.8%, -2.3% and -1.9% cut in FY16-18 EPS, respectively.

Rating

• HOLD ↔ , TP: RM5.93

• Due to its monopoly status in Malaysian fixed telco sector, regulatory risk is higher while government funding further lowers its bargaining power. Convergence is a visionary ambition but webe will drag in the medium term. Dividend policy of at least RM700m payout caps the downside.

Valuation

• Reiterate HOLD although DDM-derived TP is lowered by 3.1% from RM6.12 to RM5.93 reflecting the downward earnings revision, based on unchanged WACC of 5.8% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 28 Nov 2016