Results

• 9M17 revenue of RM626.7m was translated into a core net profit of RM136.7m which came in below expectations, only accounting for 63.4% and 61.0% of HLIB and street’s full year estimates, respectively.

Deviations

• Weaker-than-expected top line especially IRU sales coupled with higher-than-expected effective tax rate.

Dividend

• None (2Q16: none).

Highlights

• QoQ: Top line was down by 1% mainly due to the absence of one-off IRU sales. However, recurring revenue was actually up by 2%. Despite exclusion of one-off items, bottom line contracted by 32% due to higher D&A and effective tax rate.

• YoY: Sales grew 4% but more crucially, recurring revenue gained 13%. However core earnings fell by 37% for the same reasons above.

• YTD: Turnover strengthened 15% supported by data (+18%) and data centre (+24%). Core net profit was only better by 3% due to (1) absence of DiGi dividend income; (2) higher D&A; and (3) effective tax rate.

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 tax forecasts based on latest guidance. In turn, FY17-19 EPS are cut by 14%, 8% and 8%, respectively.

Rating

HOLD ↔ , TP: RM9.34

• 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. But concern now surrounds wholesale, a once high-growing segment as IRU sales soften.

Valuation

• Reiterate HOLD after revising our SOP-derived TP downward by 6.4% from RM9.98 to RM9.34 (see Figure #4), reflecting our earnings cut.

Source: Hong Leong Investment Bank Research - 27 Nov 2017