Within Expectations: 1Q18 revenue of RM1.6bn was translated into a core net profit of RM352m (pre-MFRS 15), accounting for 25% and 24% of HLIB and consensus full year forecasts, respectively.

Dividend: Declared first interim tax exempt (single-tier) dividend of 4.9 (1Q17: 4.7) sen per share, representing 98% payout based on post-MFRS 15 EPS. This will go ex on 31 May.

QoQ: Top line declined by 0.6% attributable to seasonal weakness as there are lesser operating days in 1Q18 and lower mobile termination rate (MTR) effective 1 Jan 2018 (as highlighted in our sector report entitled “2018 outlook” dated 10 Jan 2018). Core net profit was down by 3.9% due to higher depreciation from progressive CAPEX investment as well as spectrum amortization.

YoY: Despite MTR erosion, revenue gained 3.8% thanks to solid postpaid growth and stronger data monetization from prepaid, more than sufficient to offset the contraction of voice and messaging revenues. However, core net profit was lower by 5.7% for the same explanation as above.

Postpaid: Sub base continued to climb in 1Q18, topping 2.6m after adding 91k QoQ while ARPU softened RM1 QoQ to RM77. Postpaid revenue reached another record high at RM591m, up 2% QoQ and 14% YoY.

Prepaid: Lost 80k subs QoQ to a base of 9.2m with lower ARPU of RM32 (-RM2 QoQ) blaming on the persistent prepaid to postpaid migration. However, prepaid internet continue to experience strong demand surging 17% YoY to RM393m accounting for 44% of prepaid revenue.

MFRS 15: Recall that effective 1 Jan 2018, this new accounting standard will be adopted and so far positive impact is observed. 1Q18 EPS saw a 0.5 sen uplift to 5.0 sen which eventually led to higher dividend payout. However, management maintain their conservative guidance claiming that it is too early to judge the eventual impact.

Shift in Operating Model:

We are positive on this initiative as we believe that this is a sustainable business structure and will greatly improve efficiency over the longer term. This network operation outsourcing or managed services will commence in 2Q18 and rumoured to involve up to 500 employees.

Shariah Status: It has submitted its FY17 audited account to Bursa on 28 Mar and we are hopeful that it will be able to reclaim this status.

Forecast: Maintain.

Upgrade to BUY based on unchanged DCF-derived TP of RM5.10 based on WACC of 5.8% and TG of 0.5%. Still our favourite due to: (1) Highest dividend yielder; (2) Low frequency band to improve efficiency; (3) Shariah re-inclusion; (4) Strong balance sheet to support spectrum fee; and (5) Prudent management.

Source: Hong Leong Investment Bank Research - 16 Apr 2018