Results

• Reported 1H17 core net profit of RM104m, accounting for 44- 46% of HLIB and street’s full year estimates, respectively (1H16 core PAT: 42% of FY16’s). This is considered below expectations after TdC guided for a softer 2H17.

Deviations

• Revenue to ease especially in the wholesale market in view of heightened competition and lower demand.

Dividend

• None (2Q16: none).

Highlights

• QoQ: Top line was down by 6% mainly due to lower one-off IRU sales. However, recurring revenue was actually up by 3%. Despite exclusion of one-off items, bottom line contracted by 13% as contribution from high-margin IRU was lower.
• YoY: Sales grew 17% but more crucially, recurring revenue gained 15% spurring core PAT’s 39% expansion thanks to improved economies of scale.
• YTD: Turnover strengthened 21% supported by data (+23%) and data centre (+27%). As a result, core net profit was better by 29% despite the absence of DiGi dividend income.
• Revenue growth breakdown by segment: Growth YoY (% ) QoQ (% ) YTD (% ) Wholesale (incl. Astro and GT co.) +3 -23 +14 Enterprise (incl. AIMS Group) +13 +6 +12 Consumer and SME +91 +15 +98
• Revenue growth breakdown by product: Growth YoY (% ) QoQ (% ) YTD (% ) Data (incl. GT co.) +18 -9 +23 Voice -4 -2 0 Data Centre (AIMS Group) +36 +8 +27

Catalysts

• Exponential global demand for high quality data bandwidth.
• LTE node fiberization.
• Co-location, cloud computing and virtualization driving higher demand for data centre.

Risks

• Irrational wholesale pricing and competition, regulatory risks and contraction in demand for wholesale bandwidth.

Forecasts

• Adjust revenue and CAPEX forecasts based on guidance. In turn, FY17-19 EPS are cut by 9%, 6% and 2%, respectively.

Rating

HOLD ↓ , TP: RM9.98 ↓

• Still our favorite in the sector. As more undersea cables are RFS, wholesale is poised to return with strong growth trajectory underpinning its ASEAN ambition. Retail is gaining momentum on the back of reach expansion and undisputable high value products. Also, data centre is expanding resiliently as IT outsourcing, cloud computing and virtualization gain wide adoption.

Valuation

• After gaining 26% since last upgrade, we downgrade from BUY to HOLD with a lower TP of RM9.98 from RM10.28 , reflecting the downward earnings revision.

Source: Hong Leong Investment Bank Research - 29 Aug 2017