TdC’s 1Q19 core net profit of RM75m (-5% QoQ, +6% YoY) is in line. The sequential weakness was due to seasonality while YoY still exhibited growth supported by all products. Retail remained the growth driver on the back of expanded fiber footprint to 650k home-passed. All three associates were profitable and contributed RM4m. Reiterate BUY with unchanged SOP-derived TP of RM10.14.

Within expectations. 1Q19 revenue of RM263m translated into a much-anticipated core net profit of RM75m (-5% QoQ, +6% YoY), accounting for 24% of HLIB and consensus full year forecasts, respectively.

Dividend. None (1Q18: None).

QoQ. Top line was flat despite the seasonal weakness whereby data’s +2% gain was offset by voice and data centres’ -6% and -10% contractions, respectively. By segmental breakdown, retail grew 4% while wholesale and enterprise moderated by -1%, respectively. After one-off adjustment (mainly forex loss of RM11m), core net profit fell -5% attributable to higher D&A.

YoY. Turnover grew 14% supported by higher contributions from all products, where data +15%, voice +4% and data centre +9%. In turn, core PATAMI strengthened 6% to RM75m aided by improved cost efficiencies despite higher D&A. D&A was higher by 32% to RM38.4m mainly due to MFRS 16 distortion which lifted the usual run-rate by RM6.5m.

Segmental performance. Retail continued to spearhead the group’s YTD growth with 26% gain on the back of expanded fiber footprint to 650k home-passed as end of 1Q19. While, wholesale and enterprise also registered growths of 18% and 3%, respectively.

Global bandwidth sale (GBS). Sales were in the form of lease structure instead of IRU sales. TdC also highlighted that customer profile saw a shift from the traditional regional telco to OTT players.

MSAP effects. There were some engagements with access seekers but no formal agreement was formed. TdC reiterated that it has no intention to piggyback on other networks and will continue its own expansion for better service quality control.

CAPEX. Although RM320m has been budgeted, we do not fully reflect this because we have yet to see acceleration in rollout (1Q19 capex: RM34m). TdC also plans to spend RM20-30m to expand one more storey at Menara AIMS to yield additional 5k sqft of data centre floor space.

Regional associates. All 3 were profitable and contributed RM3.7m to 1Q19’s bottom line. 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. Unchanged as results are in line. Reiterate BUY with unchanged SOP-derived TP of RM10.14 (see Figure #2). We like TdC 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 are widely adopted. GBS is no longer a drag and expected to perform better as demand recovers.

Source: Hong Leong Investment Bank Research - 3 Jun 2019