Results

• FY17 core net profit of RM199.5m exceeded expectation accounting for 108% of our full year forecast but in line with street’s at 99%.

Deviations

• Sales mix with higher contribution from high-margin IRU.

Dividend

• Declared interim/special dividends of 5.3/11.9 sen (4Q16: 6.6/10.7 sen) per share, both go ex on 12 Mar. FY17 dividend amounted to 17.2 sen (FY16: 30.6 sen) per share.

Highlights

• QoQ: Top line was up by 15% as all segments grew except voice. Recurring revenue gained by 6%. Bottom line almost doubled thanks to higher contribution from high-margin IRU and improved economies of scale.

• YoY: Sales grew 6% but more crucially, recurring revenue gained 12%. However core earnings only expanded 5% due to lower contribution from high-margin IRU.

• YTD: Turnover strengthened 12% supported by data (+15%) and data centre (+21%). Core net profit was only better by 4% due to (1) absence of DiGi dividend income; (2) higher D&A; and (3) higher 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 model based on latest guidance. In turn, FY18-19 EPS are raised by 1% and 3%, respectively.

Rating

• BUY , TP: RM10.04

• 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. IRU is no longer a drag and expected to perform better as demand recovers.

Valuation

• Upgrade to BUY after revising our SOP-derived TP upward by 7.5% from RM9.34 to RM10.04 (see Figure #4), reflecting our upward earnings revision and valuation rollover.

Source: Hong Leong Investment Bank Research - 27 Feb 2018