Results

• 9M17 revenue of RM8.9bn yielded a much anticipated core net profit of RM641.3m, accounting for 77% and 75% of HLIB and consensus full year estimates, respectively.

Deviation

• Within expectations.

Dividend

• None (3Q17: none) due to semi-annual distribution. YTD amounted to 9.4 (9M16: 9.3) sen per share.

Highlights

• QoQ: Top line fell 1.3% as growths from voice (+1.3%) and internet (+2.3%) were negated by data (-5.2%) and others (-7.0%). Despite lower cost structure, bottom line still shrunk by 2.2% due to lower revenue and higher D&A in line with larger asset base.

• YoY: Turnover was rather flat (+0.6%) with internet being the only gainer (+9.4%) more than sufficient to offset voice, data and others’ contractions. However, core earnings fell 1.9% as higher maintenance, marketing and other operating expenses were incurred.

• YTD: Revenue picked up 0.7% mainly driven by internet (+8.8%), sufficiently offset the declines in voice (-3.7%), data (-2.6%) and others (-2.0%). Core net profit was up by 11.0% in the absence of webe’s accelerated depreciation.

• UniFi added 55k subs (highest run rate since 3Q12) in 3Q17 elevating total base to 1.1m, representing 38% take up rate on the back of 2.8m high speed broadband ports after completion of HSBB2 project. ARPU fell to RM199 (second consecutive erosion) though 94% of the base is on packages of >=10Mbps while HyppTV achieved higher quarterly premium channel buys.

• On the contrary, Streamyx experienced a churn of 64k subs (larger than UniFi’s net adds) ended 3Q17 with 1.3m base while ARPU was at RM91. DEL ARPU was stable at RM25.

• webe adoption gained traction with 8.0% (vs. 5.6% in 2Q17) of TM household penetration, achieving its 8-10% full year target in advance.

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 - 23 Nov 2017