We are positive on the briefing key takeaways and project FY18 to be another record year for TIME. Performance will be driven by retail data and data centre while revival of wholesale including IRU will be additional booster. Lowered our forecasts marginally after incorporating latest capex guidance which is higher than-expected. Reiterate BUY with TP of RM9.75, still one of our top picks.

Briefing outcome: Reaffirmed our bullish view on TIME. After jump starting the year with all-time high quarterly earnings, it is poised to achieve another record year in FY18. TdC is one of our top picks in the telco universe.

Wholesale: Revenue was down by 15% QoQ and 19% YoY mainly due to the absence of lumpy IRU sales. However, recurring turnover gained healthily 3% QoQ and 6% YoY despite the seasonal weakness.

Global bandwidth: Submarine cables’ recurring revenue in 1Q18 grew 17% QoQ and >100% YoY albeit from a very small base. Elevated wholesale price erosion (HLIB’s estimate of 10-20% per annum) remains stubborn and has driven customers to buy more leases instead of IRU. Nonetheless, the reversal in buying pattern was observed since the beginning of this year. YTD, TIME has participated in more enquiries, especially from China. It is optimistic that IRU demand will pick up this year and hopefully surpassing FY17’s.

Enterprise: Registered decent growths with 5% QoQ and 9% YoY although TIME expected more, blaming on price erosion in the segment. Within this segment, data centre gained 10% YoY but declined 2% QoQ mainly due the boost from non recurring revenue in 4Q17. Excluding that, it actually expanded 3% sequentially. Menara AIMS is operating at 100% capacity and expansion plans are currently under evaluations.

Retail: Continued to be the fastest growing segment with sales increasing 76% YoY and 14% QoQ in 1Q18. Premise passed has reached 500k to date and target to achieve 600k by year end. Focus will be to win more market share. Regarding the recent government’s call to “double the speed at half the price”, TIME is unperturbed and is able to comply technically. If implemented, it expects financial impact to be manageable as this segment only account for 20% of the group’s top line.

Associates: No intention to merge KIRZ and SYMC.

FY18 capex guidance: Budgeted for RM315m broken down into:

1. RM82m for submarine cable due to lag effect in cash outlay and network cards upgrade;
2. RM32m for data centre BAU, not including any floor space expansion; and
3. RM200m for domestic fixed line, which can further breakdown into (i) RM80m for BAU including network rehabilitation and upgrade; and (ii) RM120m for coverage expansion.

Forecast: FY18-20 EPS are lowered by 2-3% after updating CAPEX projection.

Reiterate BUY based on SOP-derived TP of RM9.75. We like TIME as its 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.

Source: Hong Leong Investment Bank Research - 4 Jun 2018