TM’s 1H20 core PATAMI of RM508m (-3% YoY) beat expectations. Maximum DPS of 6.8 sen is also a positive surprise, implying its full confidence of 2H20 outlook. This expansionary performance was achieved on the back of effective cost savings measures despite top line’s drag amidst this challenging period. Unifi base continued to expand while copper broadband quarterly churn has slowed down. After raising FY20-22 estimate, our DCF-derived TP is higher at RM5.22. Maintain BUY.

Exceeds expectations. 2Q20 core net profit of RM268m (+11% QoQ, +18% YoY) brought 1H20 sum to RM508m (-3% YoY) which was a positive surprise, accounting for 63% and 61% of HLIB and consensus full year forecasts, respectively. Key deviations were lower-than-expected D&A and corporate tax rate. 2Q20 core earnings were arrived after excluding forex gains of RM7m.

Dividend. Declared an interim single-tier cash DPS of 6.8 sen (2Q19: none) which goes ex on 10 Sep. This is the maximum payout ratio (60%) as per policy signalling full confidence of 2H20’s performance. YTD DPS amounted to 6.8 sen (1H19: none).

QoQ. Top line gained 1% as growths in Data (+11%) and Voice (+5%) was more than sufficient to offset the declines in Internet (-2%) and Others (-11%). However, core net profit climbed stronger by 11% to RM268m on the back of lower D&A (-8%) and superior cost structure with savings in manpower (-6%).

YoY. Turnover softened by 6% as most products recorded weaker performances led by Others (-15%), followed by Voice (-13%) and Internet (-5%). Data was the only product which grew with 4% supported by higher IRU and domestic data revenues. Yet, bottom line expanded commendably by 18% attributable to lower D&A (-7%) and improved EBITDA margin thanks lower direct (-12%) and manpower (-11%) costs.

YTD. Revenue moderated by 7% as all products recorded softer contributions: Voice (-16%), Internet (-5%) and Others (-10%) while Data was rather flat. In turn, core earnings fell by 3% to RM508m. If 1Q19’s wholesale roaming discount (RM60m) is excluded, 1H20 core PAT actually gained 10% on the back of improved efficiency.

unifi and Streamyx. Added 61k unifi subs in 2Q20 elevating total base to 1.6m, representing 48% take up rate on the back of newly-defined 3.2m high-speed broadband ports. ARPU was lower at RM150 (-RM3 QoQ). Copper broadband quarterly churn slowed down significantly to 18k subs vs. 1Q20’s 47k. At the same time, ARPU trended lower by RM1 QoQ to RM90.

Forecast. Tweak projections based on the deviations above. In turn, FY20-22 EPS are raised by 5%, 2% and 2%, respectively.

Maintain BUY call on the back of higher DCF-derived fair value of RM5.22 (from RM5.17) with WACC of 7.5% 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.

Source: Hong Leong Investment Bank Research - 28 Aug 2020