TIME’s 9M18 core net profit of RM212m (+55% YoY) was a positive surprise. Overall outperformance is attributable to (1) strong recurring revenues; (2) improved cost discipline; and (3) lower tax rate. Although TdC highlighted the new fiber plans may lead to margin compression, we opine that this can be easily cushioned by higher take up rate. Reiterate BUY with higher TP of RM10.21, reflecting our upward earnings revision.

Above expectations. 9M18 revenue of RM721m translated into a higher-than expected core net profit of RM212m (+55% YoY), accounting for 86% and 88% of HLIB and consensus full year forecasts, respectively. The positive surprise originated from lower-than-expected effective corporate tax rate.

Dividend. None (3Q17: None).

QoQ. Top line inched up by 4% supported by stronger recurring revenues (+6%) and one-off global bandwidth and non-recurring contracts (+500%) despite the negative impact from MFRS 15. Within the recurring revenues, all product lines (data, voice and data centre) grew 6% sequentially. However, core net profit dipped 1% due to MFRS 15 adjustments and higher D&A.

YoY. Turnover grew 23% supported by higher contributions from data (+39%) and data centre (+20%), more than sufficient to offset voice’s contraction (-5%). In turn, core PATAMI strengthened 114% to RM70m aided by (1) improved cost efficiencies; (2) higher contributions from associates; and (3) lower corporate tax rate.

YTD. Top and bottom lines gained by 15% and 55%, respectively for the same reasons outlined above. In terms of product, data was the major growth driver with 22% gain followed by data centre with 17% expansion, while voice declined 16%.

Segmental performance. Retail spearheaded the group’s YTD growth with 72% gain as it continued to expand fiber footprint, while wholesale and enterprise also registered double-digit growths of 10% and 9%, respectively.

Retail. Although the expansion was slower-than-expected as at end of Sep 2018, it is determined to catch up in 4Q18 and meet its target of 600k premise-pass by year end. TdC hopes to cover up to 1m premises by 2020. It highlighted that the competitively priced new fibre home broadband plans may results in reduced ARPUs and short term margin compression. However, we believe that the cheaper entry price will lead to higher take up rate which eventually offset the price erosion.

Regional associates. Both CMC (Vietnam) and Symphony (Thailand) continued to deliver positive earnings YTD more than sufficient to offset KIRZ’s minor loss. TdC is working with its associates and partner in Cambodia in network integration to achieve operational synergies and to create a seamless regional telco network across Indochina, Malaysia and Singapore.

Forecast. Tax rate adjustment has led to higher FY18-20 EPS by 2%-3%.

Reiterate BUY after increasing our SOP-derived TP by 3% from RM 9.95 to RM10.21 (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 - 28 Nov 2018