We opine that TM’s YTD performance is sustainable on the back of much leaner operating structure. Its unmatched widespread fibre asset is a mandatory pre - requisite to realize national broadband / 5G ambition. TM’s bold “Pay Nothing” campaign is expected to cease churn effectively despite short term impact. Voice margin should improve thanks to reduction in MTR. Back-loaded capex is likely to drive higher D&A in 4Q19. Projections were moderated marginally which led to lower DCF-derived TP of RM4.93. Maintain BUY.

Impressive turnaround. Since the beginning of FY19, TM has charted 3 consecutive quarterly core net profit YoY growths and ended 9M19 with RM811m, representing 54% YoY gain. This has already surpassed its own full year EBIT guidance for FY19. We expect this performance to be sustainable into 4Q19 on the back of much leaner cost structure while the impacts from MSAP on fibre and Streamyx upgrade have been fully reflected.

No fibre, no 5G. Fibre as backhaul to transfer data at the speed of light has become ever more critical and a mandatory pre-requisite in 5G deployment. Demand will spike not only in terms of capacity, but also coverage in order to compensate for 5G spectra (especially mmW) shortcoming in propagation. In Malaysia, TM has the widest fibre network with more than 540,000km, a distant leader compared to TdC’s 16,000km, TNB’s12,000km and Digi’s 9,610km. With such monopolistic position, we expect the surge in domestic wholesale will boost TM’s Data revenue and margin even under the MSAP regime. Furthermore, new fibre rollouts are commercially negotiated (price not regulated) and TM will be able to command more lucrative returns. In 9M19, Data was the main revenue growth driver with 13% gain YoY to RM2bn.

Intense FTTH competition. Since MSAP liberalization, many players have jumped on the bandwagon offering me-too products with price-focused strategy. As a result, TM’s 9M19 Internet revenue has languished 7% YoY to RM2.9bn due to subscriber attritions and aggressive product repricing. In 3Q19, copper broadband (Streamyx) base continued to experience churn of 37k subs QoQ and this was more than Unifi’s net add of 34k subs QoQ, implying that TM was not able to capture all the upgraders. To address that, TM has introduced “Pay Nothing” campaign in 4Q19 offering free Unifi to both new and existing users for up to 3 months and in return, TM will re contract campaign takers for another 24 months. While this may weigh down TM’s financial performance in the short term, we opine that this bold move is effective and will benefit TM in the longer term.

Voice. Inevitably, voice usage will continue to trend downwards no thanks to sector’s structural shift to mobile and data. In 9M19, TM’s voice revenue has dipped 10% YoY to RM2.0bn without sign of slowing down. However, voice margin should improve beginning 2020 and beyond leveraging on the 50% reduction on mobile termination rate (from 1.96 sen in 2019 to 0.99 sen in 2020) as mandated by MCMC’s MSAP.

Investment. 9M19 capex totalled RM736m signalling that the bulk will be back loaded With our capex projection of RM1.8bn for FY19, D&A may kick in higher in 4Q19.

Forecast. Tweaks in cost structure and capex led to lower FY19-21 EPS by -5%, -1% and -7%, respectively.

Maintain BUY call on the back of lower DCF-derived fair value of RM4.93 (from RM5.03) with unchanged WACC of 8% and TG of 0.5%. We are particularly positive on its cost optimization measures which now yielding impactful outcome. Leveraging on its extensive fibre reach, TM is definitely a prime beneficiary of 5G rollout. Other catalysts include the awards of NFCP and 5G airwaves.

Source: Hong Leong Investment Bank Research - 18 Feb 2020