No Major Dent From Webe

1Q17 results were broadly in line with the exception of the increasingly positive minority tax charge, which highlights the larger losses yoy at Webe. Despite this, earnings have been relatively stable, similar to profitability levels pre-Webe. Due to the solid earnings and lower expected risk, we upgrade TM to HOLD from Sell.

1Q17 Core Profit Rises 13% Yoy – Above Our Expectations

TM’s 1Q17 revenue rose 3.8% yoy to RM2.9bn but net profit fell 29% yoy to RM230m. Excluding EIs, 1Q17 core profit of RM230m (+13% yoy) was ahead of our expectations but within street estimates (accounts for 29% and 27% of our and street 2017 estimates, respectively). The variance was however due to minority interest (MI) charges, which we believe was driven by losses at 72.9%-owned Webe. Based on the MI charge of RM46m this quarter compared to RM49m in 4Q16 (and the assumption of profit for TM’s other subsidiaries not fully owned including Fiberail [54%] and Fibrecomm [51%]), the losses at Webe appear to have stabilised. Management has guided for Webe to be EBITDA-positive by 2018-19 based on household penetration of 8-10% from the current level of 4.2%.

1Q17 Core Profit Falls 15% Qoq

Sequentially, core profit fell 15% to RM230m, largely due to the low effective tax rate in 4Q16. Excluding this, earnings would have been higher qoq considering the 2ppts improvement in the EBITDA margin and lower depreciation charges (-6% qoq), as a result of the lower amount of accelerated depreciation for Webe‘s assets.

Upgrade to HOLD, Target Price Raised to RM6.15

We adjust our MI computation and raise our 2017-19E EPS by 7-9%. We also roll forward our valuation horizon, resulting in our 12-month DCFderived target price increasing to RM6.15 from RM5.85. Judging by the recent quarterly performance, the sharp earnings risk (arising from Webe) we had been concerned about was likely negated by cost improvements. Meanwhile, broadband ARPUs have remained stable and costs seem under control despite the improvement in broadband speed (a Budget 2017 measure). Upgrade to HOLD from Sell. Key risks include worse/better-than-expected demand for internet services and a quick/slow turnaround at its loss-making Webe operations.

Source: Affin Hwang Research - 24 May 2017