TM’s 1H19 core PATAMI of RM523m (+100% YoY) matched expectations after adjusting for impairment in 2Q19. This expansionary performance was achieved on the back of operational excellence where EBITDA margin improved 9ppt to 36%. UniFi’s net adds showed resilience while ARPU erosion is decelerating. FY19 guidance was unchanged and will continue to emphasize on cost rationalization. Reiterate BUY with unchanged DCF-derived TP of RM5.00.

Within expectations. 2Q19 core net profit of RM227m (-24% QoQ, +46% YoY) sums 1H19’s total to RM523m (+100% YoY) accounting for 59% and 60% of HLIB and consensus full year forecasts, respectively. We deem this to be in line in anticipation of some backloaded cost items. 2Q19 adjusted earnings was arrived after excluding impairment provision of fixed network asset amounting to RM125m following TM’s announcement of a planned price adjustment of Streamyx services.

Dividend. None (2Q18: none) as it usually declares at the end of FY.

QoQ. Top line was flat as expansions in Data (+2%) and Others (+1%) were offset by the declines in Voice (-3%) and Internet (-1%). Core net profit fell by 24% to RM227m in the absence of one-time domestic roaming cost savings in 1Q19 which amounted to RM50m as well as higher manpower cost associated to union.

YoY. Revenue softened by 6% as the growth in Data (+21%) was erased by Internet (-10%), Voice (-5%) and Others’ (-23%) declines. Nonetheless, core net profit grew by 46% thanks to efficient cost structure and narrower loss at unifi mobile.

YTD. Turnover fell by 4% as the growth in Data (+14%) was sufficient to overcome the contractions in Internet (-7%), Voice (-9%) and Others’ (-12%). However, core net profit doubled for the reason mentioned above.

UniFi. Added 16k subs in 2Q19 elevating total base to 1.3m, representing 41% take up rate on the back of 3.2m high speed broadband ports. Post major price adjustment, ARPU continued its downtrend but at a slower pace of -RM2 QoQ to RM177 (1Q19: - RM5 QoQ).

Streamyx. On the contrary, copper broadband continued to experience churn albeit at a slower rate of 49k subs (4Q18: 64k) and ended 2Q19 with a base of 823k. At the same time, ARPU was relatively stable at RM86 (-RM1 QoQ).

Forecast. Unchanged as results were considered in line.

Maintain BUY call on the back of unchanged DCF-derived fair value of RM5.00 with WACC of 7.4% and TG of 1.0%. Although market competition remains intense with more players after HSBB MSAP, we are particularly positive on its cost optimization measures which now yielding impactful outcome. Potential beneficiary of NFCP and winner of prized 700MHz airwave.

Source: Hong Leong Investment Bank Research - 29 Aug 2019