TIME’s 1H18 core net profit of RM142m (+37% YoY) was a positive surprise thanks to improved cost discipline. Despite the absence of non-recurring contracts and IRU sales, top line was chiefly driven by data and data centre’s organic growths. TIME is neutral on MSAP and neither alters its business strategy nor CAPEX. Reiterate BUY with higher TP of RM9.95, reflecting our upward earnings revision.

Above expectations. 1H18 revenue of RM471m translated into a core net profit of RM142m (+37% YoY), accounting for 61% of HLIB and consensus full year forecasts. This all-time high quarterly performance was attributable to (i) improved cost structure; (ii) positive associates’ contributions; and (iii) lower-than-expected tax rate.

Dividend. None (2Q17: None).

QoQ. Top line inched up by 4% supported by stronger recurring data and data centre revenues. Core net profit expanded at a slower rate of 1% due to higher D&A and effective tax rate.

YoY. Turnover grew 17% despite the absence of non-recurring contracts and IRU sales. Excluding that, recurring revenue increased at a quicker pace of 19% mainly driven by data and data centre. In turn, core PATAMI strengthened 47% to RM71m aided by (i) improved cost efficiencies; (ii) lower depreciation; (iii) higher contributions from associates; and (iv) MFRS 15 adjustments.

YTD. Top and bottom lines gained by 11% and 37%, respectively for the same reasons outlined above.

Segmental performance. Both data and data centre expanded by 21% YoY, more than sufficient to offset the 20% YoY decline in voice. Data’s growth is very promising with minimal boost from high-margin non-recurring revenue.

View on MSAP. Management is neutral and comfortable even if it is priced according to industry norm of RM129 (currently RM149) per month for 100Mbps. It welcomes access seekers on to its network and this may be a new wholesale revenue stream. Management is also not concerned on cannibalization and confident that its quality of service still superior. However, it believes that government policy should balance between healthy competition and re-investment into network coverage.

Associates. KIRZ was fully impaired (RM4m) and advances (RM5.5m) to it was provided for in 2Q18. Symphony performance is expected to be flattish in FY18 and only expect growth in FY19.

Forecast: After adjusting assumptions based on the deviations above, our FY18-20 EPS are raised by 7%, 2% and 2%, respectively. Reiterate BUY after increasing our SOP-derived TP by 2% from RM 9.75 to RM9.95

(see Figure #2). 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 - 29 Aug 2018