Results

• 1Q17 revenue of RM3.0bn yielded a much anticipated core net profit of RM229.8m, accounting for 28% and 27% of HLIB and consensus full year estimates, respectively.

Deviation

• Largely within expectations as we expect more aggressive marketing spend to accelerate webe’s adoption.

Dividend

• None (1Q16: none)

Highlights

• QoQ: Revenue declined 8.4% due to seasonal weakness while data was the only product charted growth (+1.9%), insufficient to mitigate contractions from voice (-6.2%), data (- 10.2%) and others (-23.2%). Despite the savings in manpower, supplies and materials costs, core net profit fell by 14.9% mainly due to lower effective tax rate in 4Q16.

• YoY: Top line grew 3.8% thanks to higher contributions from all products led by other revenue (+12.4%), followed by internet (+8.4%) and data (+3.3%), more than offset the sole decliner, voice with -5.3%. With better economies of scale, core earnings gained 13.2%.

• UniFi added 30k subs in 1Q17 elevating total base to 979k. ARPU was stable at RM201 as 81% 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.

• On the contrary, Streamyx experienced a churn of 30k subs ended 1Q17 with 1.4m base while ARPU also softened to RM90 after gaining for the past 2 consecutive quarters. DEL ARPU fell RM2 qoq to RM26.

• TM sounded more bullish on webe and aimed to achieve EBITDA neutral in FY18-19, vs. previous target of FY18-20. webe is seeing good traction at 4.2% (4Q16: 2.7%) penetration of TM households base of 2.7m, on track to achieve 8-10% by end of FY17.

• Though 1Q17 CAPEX was only RM352m or 11.9% of revenue, it is expected to pick up going forward as TM plans to complete HSBB2 in FY17 with an allocation of RM1.1bn.

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: 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 with unchanged DDM-derived TP of RM5.93 based on unchanged WACC of 5.8% and TG of 0.5%

Source: Hong Leong Investment Bank Research - 24 May 2017