TM’s 1H18 core PATAMI of RM261m (-40% YoY) is a disappointment mainly due to deteriorating cost structure. Deviated from its tradition of semi-annual dividend pay-out, blaming on the impact of MSAP regulatory pricing. unifi basic plan is now open for all which may lead to near-term cannibalization. CAPEX further cut to 19-20% of revenue. We maintain HOLD call with unchanged DDM derived TP of RM3.21. Downside should be limited by its decent dividend yield of 5.2%.

Below expectations. 1H18 revenue of RM5.8bn was translated into a disappointing core net profit of RM261m, accounting for 38% and 40% of HLIB and consensus full year forecasts, respectively. The main culprit was weaker-than-expected EBITDA margin.

Dividend. Deviated from its tradition of semi-annual pay-out, blaming on the impact of MSAP regulatory pricing (2Q17: 9.4 sen per share).

QoQ. Top line gained 3% attributable to higher contributions from Internet and Others which more than offset the declines in Voice and Data. Government / corporate and global segments returned to growth, while retail continued to see mild contraction. Core net profit grew by 48% due to lower expenditures in (i) manpower; (ii) supplies and materials; and (iii) other operating costs.

YoY. Revenue fell 2% as growth in Internet (+10%) and Others (+11%) were erased by the declines in Voice (-12%) and Data (-17%). Retail was the only market segment with expansion. As a result, core net profit nosedived 52% impacted by higher cost structure and effective corporate tax rate.

YTD. Turnover fell by 3% due to the declines in Voice (-8%), Data (-11%) and Others (-2%) which more than nullified Internet’s gain (+7%). Core earnings plunged by 40% caused by higher cost structure mainly from direct costs, maintenance and bad debts.

UniFi. Added 40k subs in 2Q18 elevating total base to 1.2m, representing 39% take up rate on the back of 3.1m high speed broadband ports after completion of HSBB2 project. ARPU fell to RM191, its 5th consecutive quarterly erosion.

Broadband (Streamyx). On the contrary, Streamyx experienced a churn of 44k subs (larger than UniFi’s net adds) ended 2Q18 with 1.1m base. At the same time, ARPU eased RM2 QoQ to RM88.

Product update. unifi basic plan, an affordable RM79 per month broadband only plan (30Mbps with 60GB quota) which was initially offered to B40 segment only, is now available for all. This may lead to cannibalization in the near term.

CAPEX guidance. Further lowered to 19-20% of revenue vs. 20-22% guided in Jul.

Forecast. After tweaking our cost assumptions, FY18-20 EPS were lowered by 12%, 13% and 12%, respectively.

Reiterate HOLD on the back of unchanged DDM-derived TP of RM3.21 using WACC 6.3% 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 unifi mobile will drag in the medium term. Dividend policy of at least RM700m payout caps the downside.

Source: Hong Leong Investment Bank Research - 30 Aug 2018