TM’s 9M18 core PATAMI of RM528m (-18% YoY) was a positive surprise thanks to its effective cost rationalization. Revised dividend policy whereby yearly payout will be based on 40%-60% of its PATAMI. The MSAP impact on retail segment has yet to be fully reflected in 3Q18. We maintain HOLD call with lower DCF-derived TP of RM2.57. Exclusion from CI will be a near term downside risk.

Above expectations. Excluding the major one-off impairment amounted to RM995m, 9M18 revenue of RM8.7bn translated into a stronger-than-expected core net profit of RM528m, accounting for 87% and 88% of HLIB and consensus full year forecasts, respectively. The main culprit was stronger-than-expected EBITDA margin.

Dividend. None (9M17: 9.4 sen per share). TM also announced the revision of its dividend policy whereby yearly payout will be based on 40%-60% of its PATAMI. Dividends will be paid depending on overall business and earnings performance, capital commitments, financial conditions, distributable reserves and other relevant factors.

QoQ. Top line growth was flat as higher contributions from Voice (+8%) and Data (+8%) were partly offset by the declines in Internet (-5%) and Others (-6%) segments. Excluding the major one-off impairment amounted to RM995m, core net profit grew by 71% due to lower expenditures in (i) direct cost; (ii) maintenance; and (iii) marketing.

YoY. Revenue expanded negligibly as growth in Internet (+2%) and Others (+12%) were erased by the declines in Voice (-5%) and Data (-5%). TM ONE (enterprise and government) was the only market segment with expansion. Core net profit jumped 31% on the back of improved cost structure and lower D&A.

YTD. Turnover fell by 2% due to the declines in Voice (-7%) and Data (-9%) and which more than nullified the gains in Internet (+5%) and Others (+3%). Core earnings fell by 18% caused by higher cost structure, net finance expense and effective corporate tax rate.

UniFi. Added 44k subs in 3Q18 elevating total base to 1.3m, representing 39% take up rate on the back of 3.3m high speed broadband ports after completion of HSBB2 project. While ARPU inched up RM3 QoQ to RM193, this may not fully reflect the impact of hugely-discounted new packages flooding the market.

Broadband (Streamyx). On the contrary, Streamyx experienced a churn of 60k subs (larger than UniFi’s net adds) ended 3Q18 with 1.0m base. At the same time, ARPU eroded RM1 QoQ to RM87.

Forecast. After tweaking our cost and dividend assumptions, FY18-20 EPS were raised by 23%, 21% and 47%, respectively.

Reiterate HOLD after lowering our fair value to RM2.57 (was RM3.21) as we change our valuation methodology from DDM to DCF (WACC 6.3% and TG of 0.5%) in tandem with the revision of dividend policy. 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. Over the near term, TM may be disqualified as CI component.

Source: Hong Leong Investment Bank Research - 27 Nov 2018