TM’s FY18 core PATAMI of RM632m (-53% YoY) was a disappointment due to higher-than-expected D&A and effective tax rate. However, this beat consensus estimate. UniFi’s net adds showed resilience but the drastic QoQ drop of 5% in ARPU is alarming in tandem with the industry-wide price cut. Attrition in Broadband continued to outweigh UniFi’s acquisitions although ARPU was stable. FY19 guidance signals greater emphasis in cost rationalization to at least keep profitability flat. We maintain HOLD call with higher DCF-derived TP of RM2.89.

Below expectations. FY18 revenue of RM11.8bn translated into a weaker-than expected core net profit of RM632m, only accounting for 85% of our full year forecast as major deviations lied in D&A and tax rate. However, this is above street’s at 113%.

Dividend. Declared interim single-tier dividend of 2.0 (4Q17: 12.1) sen per share which will go ex on 14 Mar. YTD dividend amounted to 2.0 (FY17: 21.5) sen per share, representing 49% payout of reported profit.

QoQ. Top line grew 5% as higher contributions from Voice (+8%), Data (+11%) and Others (+8%) were sufficient to offset the decline in Internet (-2%). Excluding one-offs, core net profit plunged 61% due to higher expenditures in (i) direct cost; (ii) supplies and materials; (iii) maintenance; and (iv) other operating costs.

YoY. Revenue softened by 4% as the declines in Internet (-2%), Data (-7%) and Others (-8%) erased the surprising growth in Voice (+1%). TM Global was the only market segment with expansion of 11%. Core net profit dived 53% on the back of higher D&A and effective corporate tax rate.

YTD. Turnover fell by 2% due to the declines in Voice (-5%), Data (-9%) and Others (- 1%) which more than nullified the gain in Internet (+4%). As a result, this has led to 27% fall in core earnings after subjected to higher effective tax rate.

UniFi. Added 37k subs in 4Q18 elevating total base to 1.3m, representing 41% take up rate on the back of 3.2m high speed broadband ports after completion of HSBB2 project. ARPU has started to reflect the recent major price adjustment by decreasing RM9 QoQ to RM184. While TM shared that the impact of down trading is limited, new subscriber acquisition will continue to weigh down on ARPU going forward.

Broadband (Streamyx). On the contrary, Streamyx experienced a churn of 89k subs (larger than UniFi’s net adds) ended 4Q18 with a base of 936k. At the same time, ARPU was relatively stable at RM88 (+RM1 QoQ).

FY19 guidance. (1) Revenue growth to be low to mid-single digit decline; (2) Absolute EBIT to be higher than FY18 level at circa RM1bn; and (3) Capex to match FY18’s or 18% of revenue.

Forecast. Based on the latest guidance and data points, we cut FY19-20 EPS by 8% and 23%, respectively.

Reiterate HOLD after raising our DCF-derived fair value to RM2.89 (was RM2.57) as we roll forward our valuation with WACC of 7.5% (previously 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.

Source: Hong Leong Investment Bank Research - 27 Feb 2019