TM’s 1Q18 core PATAMI of RM105m (-53% QoQ; -54% YoY) is a disappointment. Despite the seasonal weakness, 1Q18 performance due to the dismal showings of TM ONE and Global. Profitability was dragged by higher (1) manpower cost; (2) D&A; and (3) effective corporate tax rate. We maintain HOLD call with lower TP of RM4.29. Downside is limited by its decent dividend yield of 4.5%.

Below expectations: 1Q18 revenue of RM2.8bn was translated into a core net profit of RM105m (post-MFRS 15), accounting for only 12% of HLIB and consensus full year forecasts, respectively.

Deviations: (1) Lower contribution from higher-margin business segment; (2) Higher D&A; and (3) Higher effective tax rate – mid 30’s going forward.

Dividend: None (1Q17: none) according to its semi-annual distribution practice.

QoQ: Top line declined by 11% attributable to seasonal weakness as there are lesser operating days in 1Q18. Apart from Internet being flattish, all products registered contractions. In terms of customer cluster, TM ONE experienced challenges from government and USP projects. Core net profit plunged by 53% due to higher (1) manpower cost; (2) D&A; and (3) effective corporate tax rate.

YoY: Revenue and core net profit fell 4% as Internet’s 5% growth was erased by the declines in Voice (-6%), Data (-5%) and Others (-16%). Retail was the only market segment with expansion. As a result, core net profit nosedived 54% for the same explanations above.

UniFi: Added 51k subs in 1Q18 elevating total base to 1.2m, representing 39% take up rate on the back of 3.0m high speed broadband ports after completion of HSBB2 project. ARPU fell to RM194, 4th consecutive quarterly erosion.

Broadband (Streamyx): On the contrary, Streamyx experienced a churn of 78k subs (larger than UniFi’s net adds) ended 1Q18 with 1.1m base while ARPU was stable at RM90.

unifi Mobile (webe): Adoption gained traction with 10% (vs. 9.8% in 4Q17) of TM household penetration. With mobility, TM has begun to focus on upgrading customers from pure voice or broadband toward triple or quadruple-play services, converting them into convergence households. This has led to 45% (vs. 36% in 1Q17 and 42% in 4Q17) of TM’s household having 3-Play services and above (combination of phone, broadband, TV and/or mobile).

Forecast: Tweak model based on the deviations above and audited FY17 financial figures. In turn, FY18-19 EPS were lowered by 16% and 19%, respectively.

Reiterate HOLD after lowering our DDM-derived TP by 28% from RM5.93 to RM4.29 using WACC 6.3% (previously 5.8%) and TG of 0.5%. 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.

Source: Hong Leong Investment Bank Research - 23 May 2018