Results

• 9M17 turnover of RM4.7bn yielded a core net profit of RM1.1bn, accounting for 71.1% and 72.2% of HLIB and street’s FY estimates, respectively.
• Deemed in line as we anticipate a stronger 4Q17 supported by encouraging prepaid performance.

Deviations

• Within expectations.

Dividends

• Declared 3rd interim tax exempt (single-tier) dividend of 4.9 sen per share (3Q16: 5.6 sen), representing 99% payout, which goes ex on 21 Nov. YTD dividend of 14.2 sen per share (9M16: 16.1 sen).

Highlights

• QoQ: After two consecutive of quarterly declines, top line was up marginally by 1.1% as postpaid continued to grow while prepaid stabilized. Core net profit expanded by 7.2% thanks to finance cost savings although this was partly offset by higher D&A as 900/1800MHz spectrum amortizations which began on 1 Jul 2017.
• YoY: Excluding non-core, service revenue contraction was larger at -5.0% mainly dragged by prepaid segment where its voice plunged 23.1% while data was flat. In turn, core net profit weakened by 12.3% due to the compounded effects of weaker IDD margin, higher device sale and higher D&A associated to spectrum amortizations.
• YTD: Top and bottom lines contracted by 4.7% and 9.8%, respectively for the same explanations above.
• Postpaid: Sub base continued to climb in 3Q17, topping 2.4m after adding 103k QoQ while ARPU moderated RM1 QoQ to RM77. Postpaid revenue reached another record high at RM557m, upped 3.9% QoQ and 13.9% YoY. Internet subscription now accounted for 89.7% of postpaid base.
• Prepaid: Lost 281k subs QoQ, more than offset 2Q17’s net adds, the only improvement in the past 6 quarters and ended with a base of 9.5m. However, ARPU has stabilized as data monetization accelerated and sufficiently mitigated the fall in voice.
• Spectrum: Yet to decide on the recent 700MHz reallocation and is in deliberation with regulator regarding 2.1GHz which is expiring in Apr 2018. 2.6GHz got extended for 2 years till end of 2019.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM4.50 ↔

• Still our favorite among the large cap telcos due to its under- leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Valuation

• Maintain HOLD with unchanged DCF-derived TP of RM4.50. Our fair value is derived based on DCF with WACC of 6.0% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 19 Oct 2017