TM’s 1Q21 core PATAMI of RM332m (+71% QoQ, +38% YoY) beat expectations on the back of effective cost savings measures and lower D&A. Unifi recorded another record-breaking quarterly net adds of 175k, more than sufficient to offset Streamyx’s attrition. Management reiterated FY21 guidance which implies growth on the back of prudent CAPEX. After raising FY21-23 estimates, our DCF-derived TP is higher at RM7.93. Maintain BUY. Leveraging on its extensive fibre reach, TM is perceived to be the critical fundamental building block of government’s 5G rollout under MyDigital initiative.

Beat expectations. 1Q21 core net profit of RM332m (+71% QoQ, +38% YoY) exceed our and consensus estimates at 32% and 30%, respectively. The positive surprise was due to lower-than-expected cost structure and D&A. 1Q21 core earnings was arrived after excluding forex loss which amounted to RM6m.

Dividend. None (1Q20: none). TM traditionally distributes dividend on a semi-annual basis.

QoQ. Top line moderated by 6% as the declines in Voice (-10%) and Others (-26%) were more than sufficient to offset the expansions in Internet (+3%) and Data (+2%). However, core net profit jumped 71% thanks to (i) superior cost control measures where other OPEX fell by 36%; (ii) lower D&A (-3%); and (iii) lower effective corporate tax rate (1Q21: 20.5% vs 4Q20: 27.8%).

YoY. Sales strengthened by 10% as all products recorded commendable growths, led by Data (+26%), followed by Others (+9%), Internet (+4%) and Voice (+2%). Despite the higher net interest expense (+71%) due to early redemption of Islamic MTN, bottom line gained at a faster pace of 38% to RM332m as (i) cost control measures bore fruit where other OPEX fell by 22% thanks to savings in maintenance, utilities, advertising and promotion; and (ii) lower D&A (-1%).

unifi and Streamyx. 175k new unifi subs in 1Q21, back-to-back record high quarterly net-add, lifted total base to 1.95m while ARPU was lower at RM144 (-RM9 QoQ). Copper broadband quarterly churn was 65k subs QoQ and ended the quarter with 492k subs. At the same time, ARPU trended slightly lower at RM91. (-RM1 QoQ)

FY21 guidance. Reiterate (1) Revenue growth: flat to single digit growth; (2) EBIT: higher than RM1.6bn; and (3) Capex: 14%-18% of revenue.

Forecast. Updated model based on the deviations mentioned above. In turn, FY21-23 earnings are raised by 7%, 3% and 3%, respectively. Reiterate BUY call on the back of higher DCF-derived TP of RM7.93 (from RM7.88) with WACC of 7.7% and TG of 0.8%. We are particularly positive on its cost optimization measures which is now yielding an impactful outcome. Leveraging on its extensive fibre reach, TM is perceived to be the critical fundamental building block of government’s 5G rollout under MyDigital initiative. Furthermore, TM is well positioned as the sole Malaysian Cloud Service Provider when sovereignty is the utmost important in dealing with government’s data.

Source: Hong Leong Investment Bank Research - 28 May 2021