Although 2Q17 earnings were weaker sequentially, 1H17 core earnings of RM438m (+18% yoy) were within expectations. However, profit growth was due to a lower effective tax rate as operating margins were weaker yoy, likely due to expenses relating to the rollout of its webe service. On the whole, with limited risk to our earnings forecasts, we keep our Hold rating on the stock.

1H17 Core Profit Rises 18% Yoy – Within Expectations

TM’s 1H17 core earnings of RM438m (+18% yoy) were within expectations accounting for 50%-51% of our and the street’s 2017 estimates. The stronger core earnings were, however, due only to a lower effective tax rate (-1.4ppts qoq). At the pretax level, 1H17 earnings were down 14% yoy dragged lower by flat revenues (+0.7% yoy) and a weaker EBITDA margin (-1.2ppts yoy). TM has proposed a higher 1H17 DPS of 9.4 sen (1H16: 9.3 sen).

2Q17 Core Profit Down 10% Qoq

Sequentially, core profit fell 9.5% to RM208m, largely due to flat revenue (+0.5%) and a 1.6ppt qoq contraction in the EBITDA margin to 30.3% in 2Q17. The drag on margins was largely attributed to the higher other operating cost, a result of the increase in site rentals and licensing fees. We believe that this was partly due to the expansion of its webe operations, which has achieved >80% LTE coverage in major cities. Operationally, the voice business (revenue down 2.5% qoq) continued to suffer a structural decline. Revenues for the data and internet segments were up 1.8% and 1.3% qoq respectively. While growth for the latter was driven by ARPU expansion, broadband subscriber expansion seemed to have plateaued over the past year, and registered a decline in 2Q17 (-11k qoq), driven by higher churn for its Streamyx product vis-à-vis a smaller growth for its Unifi segment.

Maintain HOLD and Target Price of RM6.15

We adjust slightly our 2017E EPS post the 2Q17 results but leave our 12- month DCF-derived TP unchanged at RM6.15. We maintain our Hold rating mainly for its stable earnings despite the rollout of webe. TM is now our top pick within the sector give limited competitive pressure that we expect in the cellular space. Dividend yields at 3.3% are also on par with the sector. Key risks: worse/better-than-expected demand for internet services and a quick/slow turnaround at its loss-making webe operations.

Source: Affin Hwang Research - 30 Aug 2017