TM reported a weak set of results – 1Q18 core net profit halved to RM115m on lower revenue across most segments (except internet). The results were below market and our expectations. We cut our FY18- 20E EPS by 16-21%, expecting weak government and enterprise spending in 2Q-3Q18, and flat-to-lower broadband ARPU (vs earlier assumptions of 2-3% growth). We also increased our WACC by 100bps to reflect the higher risk premium, in relation to the governments’ plan to halve the broadband price, where the strategy / outcome is still uncertain. The weak share price (-31% in 3M) has largely priced in the negatives, we believe. Maintain HOLD.

1Q18 Core Net Profit Halved, Below Expectations

TM’s 1Q18 core net profit of RM115m (-50% yoy) was grossly below market and our expectations, accounting for 12% of street and our full year forecasts. Key variances to our forecasts are lower than expected revenue and weak EBITDA margin. TM reported revenue declines for most business segments due to lower government and business spending; only the internet segment delivered higher revenue on an increased customer base.

Sequentially, Core Profit Fell by 48%

Sequentially, TM’s core net profit fell by a similar quantum (-48%). A steep decline in revenue (-11%) from the seasonally stronger 4Q was partly mitigated by lower operating costs (-10% qoq).

Management Maintains Key Guidance, for Now

Despite the challenging market landscape, management maintains its key guidance: (i) 2018 EBIT to be flat vs 2017 (RM1.2bn); (ii) dividend policy of RM700m or 90% of normalised PATAMI, whichever higher; (iii) 2018 capex at 25-30% of operating revenue; and (iv) debt / EBITDA guideline of 2.5x.

TM will join the Communications and Multimedia Ministry’ task force (to be set up) on the “doubling speed / halve the price” programme

TM has recently met up with the Communications and Multimedia Ministry to discuss the Pakatan Harapan’s manifesto that stated “we will take the necessary steps to halve the price of broadband internet while doubling its speed”. The Communications and Multimedia Ministry will set up a task force to oversee the programme, where TM will join as a committee member. Management did not provide details on its plan / strategy on this programme.

Source: Affin Hwang Research - 23 May 2018