Telekom Malaysia (TM) reported a solid set of results – 3Q18 core net profit grew by 31% yoy to RM266m (+71% qoq) on lower operating and depreciation costs. The group booked in RM995m impairments loss in 3Q18, resulting in a headline net loss of RM176m. Management has revised the dividend policy, now looking at distributing 40% to 60% of PATAMI (from the higher of RM700m or up to 90% previously). Overall, the results were above market and our expectations. We raised our 2018-20E EPS by 14-21% and increased our DCF-derived price target to RM2.30 (from RM2.25). Upgrade to HOLD (from SELL) in view of lower downside in share price, after a 35% decline in 3- month.

Lower 9M18 Core Net Profit (-18% Yoy) But Ahead of Expectations

TM reported weaker 9M18 core net profit of RM528m (-18% yoy) due to lower revenue (-1.7% yoy), weaker EBITDA margin of 29.3% (-1.4ppt) and higher interest expenses. 9M18 Headline net profit was substantially lower at RM84m (-87% yoy) after incorporating RM995m impairment losses (fixed and wireless legacy network assets), cushioned by RM312m gain from unwinding of a discount on a put option for Webe. Overall, the results were ahead of street and our expectations – 9M18 core net profit account for 88% of street and 101% of our full year earnings forecasts. The earnings surprise was attributable to higher internet revenue, lower marketing and depreciation & amortisation (D&A) expenses.

Sequentially, 3Q18 Core Net Profit Grew by 71% Qoq From Weak 2Q18

TM reported a commendable 3Q18 core net profit of RM266m (+31% yoy, +70% qoq). The strong sequential earnings recovery was due to higher EBITDA margin, lower D&A charges and lower tax.

Revised Dividend Policy – to Distribute 40% to 60% of PATAMI

Management has revised the dividend policy, as expected. However, the new payout of 40-60% of PATAMI is lower than our expectation of 80-90%.

Unifi ARPU Inched Up in 3Q18 While Streamyx ARPU Declined

Unifi ARPU unexpectedly inched up in 3Q18 to RM193/month (from RM190 in 2Q18) while Streamyx ARPU slipped to RM87 (from RM88). We believe the statistics have yet to reflect TM’s new Unifi pricing, where lower priced entry level packages should lead to downtrading. Notably, TM’s total broadband customer based has declined to 2,286k in 3Q18 (from 2,302k in 2Q18 and 2,350k in 3Q17) due to stiff competition, we believe.Raising FY18-20E EPS forecasts by 14-21%

We raised our FY18-20E EPS forecasts by 14-21%, incorporating: (i) the stronger than expected 9M18 earnings; (ii) lower marketing expenses; (iii) lower D&A expenses following the asset impairment; and (iv) lower interest expenses due to decline in net debt after revision in the dividend payout ratio.

Upgrade to HOLD Following Steep Decline in Share Price

In tandem with our earnings upgrade, we raised our DCF-derived 12 month price target to RM2.30 (from RM2.25). We upgrade TM to HOLD (from SELL) in view of the limited downside to share price following a steep 35% decline in share price over the past 3 months – its current valuation of 17.7x 2019E PER / 4.9x 2019E EV/EBTIDA looks fair. While TM’s operating outlook remains challenging – rising competition, lower package prices, we think the negatives are largely priced in. Upside risks: robust broadband ARPUs, strong subscribers growth and material decline in operating costs; downside risks: sharp decline in broadband ARPUs, weak subscribers growth.

Source: Affin Hwang Research - 27 Nov 2018