TM’s 1Q20 core PATAMI of RM241m (+27% YoY, -19% YoY) beat expectations. This expansionary performance was achieved on the back of effective cost savings measures despite top line’s underachievement in this challenging period. Similar to other telcos, TM pulled its earlier guidance due to Covid-19 outbreak. After raising FY20-21 estimates and lowering WACC, our DCF-derived TP is higher at RM5.17. Maintain BUY.

Exceeds expectations. 1Q20 core net profit of RM241m (+27% QoQ, -19% YoY) was a positive surprise, accounting for 31% and 28% of HLIB and consensus full year forecasts, respectively. Key deviations were lower-than-expected interest expense and corporate tax rate. 1Q20 core earnings was arrived after excluding RM80m forex loss on borrowings, RM4m forex loss on international trade settlement and other losses of RM5m.

Dividend. None (1Q19: None).

QoQ. Top line fell 16% due to seasonal weakness as declines in Voice (-21%), Data (-25%) and Others (-25%) more than offset the growth in Internet (+3%). However, core net profit climbed by 27% to RM241m on the back of lower D&A (-6%) and superior cost structure with savings in direct costs (-26%), manpower (-11%), materials (-54%) and other opex (-20%).

YoY. Turnover softened by 8% as all products recorded weaker performances led by Voice (-20%), followed by Data (-4%), Others (-4%) and Internet (-4%). In turn, this has led to bottom line falling 19% despite lower corporate effective tax rate at 12% (vs 1Q19’s 31%). Recall that 1Q19 earnings was boosted by one-time wholesale roaming discount of RM60m from Celcom. If that is excluded, 1Q20 core net profit actually gained by 2% on the back of improved efficiency.

unifi and Streamyx. Added 46k unifi subs in 1Q20 elevating total base to 1.5m, representing 42% take up rate on the back of 3.5m high-speed broadband ports. ARPU held steady at RM153. On the contrary, copper broadband continued to experience churn of 47k subs QoQ and ended 1Q20 with a base of 0.7m. At the same time, ARPU (redefined) trended lower by RM5 QoQ to RM91.

Guidance withdrawn. Due to Covid-19, TM believes it is prudent to revisit this when there is better clarity.

Forecast. Tweak projections based on the deviations above. In turn, FY20-21 EPS are raised by 2% and 7%, respectively. Maintain BUY call on the back of higher DCF-derived fair value of RM5.17 (from RM4.72) with WACC of 7.5% (previously 8.0%) and TG of 0.5%. We are particularly positive on its cost optimization measures which now yielding an 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 as well as re admission into KLCI index.

Source: Hong Leong Investment Bank Research - 21 May 2020