Telekom Malaysia (TM) reported a record quarterly core profit that exceeded all expectations. 1Q19 core profit accounted for 49% of the street’s and our full-year earnings forecasts. Despite a weaker revenue (-2.4% yoy), TM’s 1Q19 core net profit jumped 182% yoy to RM296m on lower Webe losses and significant margin improvement arising from improved operational efficiency, cost rationalisation and adoption of MFRS 16. In view of the swift and significant margin improvement, which looks sustainable, we raise our 2019-21E core EPS by 50-63% and increase our DCF-derived price target to RM4.15. Upgrade to BUY (from HOLD). At 13.5x 2020E PER, TM is trading at a discount to its telco peers and the KLCI, and looks attractive.

Record 1Q19 Core Profit of RM296m (+182% Yoy), Above Expectations

TM reported a strong set of results that exceeded all expectations – 1Q19 core net profit jumped 182% yoy to a record RM296m on lower Webe losses and improved operational efficiency, cost optimisation and adoption of MFRS 16 (Fig 2), which more than offset a 2.4% yoy decline in revenue (Fig 1). Management has delivered cost improvements across all major cost items, including dealer commission, staff benefits, cable charges & customer equipment, rental of network sites and A&P charges. In particular, the direct costs declined by a notable 18% yoy to RM695m on lower network costs and dealer commissions. All in, the results were above market and our expectations – TM’s 1Q19 core net profit accounted for 49% of the street’s and our full-year earnings forecasts.

Unifi Subs Continue to Grow, Decline in ARPU Looks Manageable

TM’s 1Q19 internet revenue slipped by 3.5% yoy due to a decline in the number of Streamyx subscribers and the lower Unifi ARPU. Against a challenging market condition (lower package prices, higher competition), TM’s internet business segment has held up reasonably well – the Unifi customer base grew by 12% yoy to 1.32m, while the Unifi ARPU fell from RM193/month to RM179/month which looks manageable considering the steep cut in package prices. Management guided that less than 10% of its Unifi customers downgraded their packages. Rather, the decline in ARPU was due to the dilution from new entrants who have opted for the lowerpriced packages. The number of Streamyx customers has continued to decline (-23% yoy to 872k) as consumers ditched the slow copper wire network for alternative solutions. Elsewhere, TM has continued to increase its convergence penetration – the 3P (& above) households now account for 56% of TM’s subscriber base, from 45% in 1Q18.

Source: Affin Hwang Research - 31 May 2019