Telekom Malaysia (TM) reported a modest set of results – 2018 core net profit fell by 27% yoy to RM632m on lower revenue and a weaker margin, within our expectations but ahead of street forecasts. Management gave a rather positive earnings guidance for 2019, expecting EBIT to be higher than in 2018 on cost optimisation, in spite of a low-mid single digit decline in revenue. The ARPU for TM’s fixed broadband business held up better than expected. In view of the lowerthan-expected decline in broadband ARPUs and management’s proactive cost optimisation measures, we raise our 2019-20E EPS by 11-24% and increase our DCF-derived price target to RM3.10 (from RM2.30). Upgrade to HOLD (from SELL).

2018 Core Net Profit Fell by 27% Yoy, Within Our Expectations

TM reported a modest set of results - 2018 core net profit fell by 27% yoy to RM632m on lower revenue (-2.2% yoy), a weaker EBITDA margin of 29.3% (-0.7ppt) and higher interest expenses. The core net profit is within our expectations but 15% above the street estimate. The group’s 2018 headline net profit was substantially lower at RM153m (-84% yoy) given several oneoff items. In tandem, TM declared a lower 2018 dividend of 2 sen (2017: 21.5 sen), equivalent to 49% of the reported EPS.

Lower 4Q18 Core Earnings Due to Lower Margins, Higher Interest

Sequentially, TM’s 4Q18 core net profit fell by 61% to RM105m due to the higher operating cost (+8% qoq), higher depreciation/amortisation expenses (+8% qoq) and a sharp increase in interest costs.

The Positives (ARPU, Cost), Neutral (capex) and Negative (subs)

Positives: TM’s 4Q18 Unifi ARPU declined by merely 5% qoq to RM184 – a notable achievement considering the price cut in entry-level Unifi packages. Management guided that the number of customers downtrading is small and manageable. On the cost side, TM has shaved its manpower cost by 6% yoy and marketing expenses by 28%. Elsewhere, the 2018 capex of RM2.1bn (-22% yoy) equalled 18.1% of 2018 revenue, below management guidance for a 19-20% capex/revenue ratio. We are neutral on management’s plan to maintain its 2019 capex at 18% of revenue. Key negative from the 4Q18 update: the continual decline in the number of fixed broadband subscribers. TM had 2.23m fixed broadband subscribers in 4Q18 (-4.2% yoy, -2.3% qoq). We believe the decline was due to both fixed-line competitors and a switch to mobile broadband.

Source: Affin Hwang Research - 27 Feb 2019