9M16 earnings remain weak

9M16 core profit fell 7% yoy. This was within our expectations but below street’s. TM is set to register its third consecutive year of earnings decline on widening losses from wireless unit, Webe. We doubt this will turnaround soon and TM faces the prospects of lower broadband prices next year. Maintain SELL and TP of RM5.85.

9M16 results within our expectations but below street’s

TM reported stronger headline net profit of RM622m (+22% yoy). But after excluding one-offs, core net profit of RM578m fell 7% yoy, despite 9M16 revenue growth of 3% yoy. The weaker 9M16 earnings were dragged down by higher interest expenses (+20% yoy) and higher depreciation charges (+7% yoy). The latter was due to accelerated depreciation charges and write-off of WiMax assets. 9M16 EBITDA margin was nevertheless slightly firmer at 32.4% (+0.9ppts yoy). On the whole, results were within our expectations, accounting for 75% of our 2016E estimates but only accounted for 68% of street’s.

3Q16 improves from low base

Sequentially, core profit jumped 24% to RM208m due to the low base in 2Q16, but was nevertheless still lower by 9% yoy. In terms of operating trends, voice revenue continues to shrink, declining 2.7% qoq. The internet division remains the bright spot. Total internet subs grew by 4k during the quarter although growth has been slowing, largely due to the higher churn at its Streamyx business. However, Unifi’s ARPU continued to trend up on take up of higher packages. As at 3Q16, 75% of subscribers are on packages of 10Mbps and above.

Maintain SELL and target price of RM5.85

TM looks set to register its third consecutive year of earnings decline in 2016E, partially driven by ballooning losses at Webe. While we are expecting earnings to turnaround in 2017E, we think that there could be downside risks from lower broadband prices to be implemented following measures introduced in Budget 2017. Maintain Sell and 12-month DCFderived target price of RM5.85 (WACC of 6.9% and terminal growth of 1%). Key upside risks include positive earnings and dividend surprises, better-than-expected demand for internet services after the price cuts, and a quick turnaround of its loss-making Webe operations

Source: Affin Hwang Research - 28 Nov 2016