Telekom Malaysia (TM) reported a decent set of results – 6M19 core net profit doubled to RM523m on margin improvement arising from better operational efficiency, cost rationalisation and adoption of MFRS 16. Although 2Q19 core net profit fell by 24% qoq to RM227m due to lower one-off cost savings, the sequential decline was largely expected. Overall, the results were above market expectations but within our forecasts. Maintain HOLD on TM with an unchanged DCF-derived TP of RM4.15. At a 16x 2020E PER, TM now trades at 1SD below its 7-year average and looks fair, considering its weak revenue outlook and stiff competition in the fixed broadband and cellular markets.

6M19 Core Net Profit Doubled; Above Consensus But Within Our Forecast

TM reported a decent set of results. Notwithstanding a 4% decline in 6M19 revenue, TM’s core net profit jumped 100% yoy to RM523m on a higher EBIT margin (+8.4 ppt to 16.2%), driven by improved operational efficiency, cost optimisation and the adoption of MFRS 16 (Fig 2). Management has delivered cost improvements across all major cost items. TM’s 6M19 headline net profit was lower at RM422.5m, however, due to forex losses and the recognition of the RM124m impairment related to its fixed network asset. All in, TM’s results were above consensus but within our expectations; TM’s 6M19 core net profit accounts for 60% of the consensus full-year forecast and 54% of ours.

Against the Record 1Q19, Earnings Fell by 24% Qoq

TM’s 2Q19 core net profit weakened by 24% qoq to RM226.8m due to normalisation in its operating costs and a high base. To recap, TM reported a record quarterly core net profit of RM296.4m in 1Q19, partly attributable to the recognition of some one-off savings from domestic roaming rates. TM’s 2Q19 headline net profit was sharply lower qoq (-63%) due to lower one-off cost savings and the recognition of RM124m of impairment losses.

Operational Stats Are Largely Within Expectations

TM’s 2Q19 operational statistics are broadly within expectations: (i) Unifi ARPU slipped by RM2 to RM177/month due to the ARPU dilution from new subscribers who are taking up lower-priced packages; (ii) Streamyx ARPU fell by RM1 to RM86/month; (iii) Unifi continues to gain subscribers (+16k to 1,339k), partly driven by migration from Streamyx users; and (iv) Streamyx continued to see a decline in subscribers (-49k to 823k) due to migration to mobile broadband, Unifi and other service providers.

Maintain HOLD With An Unchanged TP of RM4.15

We maintain our earnings forecasts, HOLD rating and 12-month TP of RM4.15 based on DCF valuation (7.5% WACC. 1.5% LTG). At a 16x 2020E PER, TM is currently trading at -1 standard deviation from its 7-year average, and looks fair, considering its weak revenue outlook, rising competition in the fixed broadband market and TM’s ongoing expansion into the highly competitive cellular space.

Key Risks

Key upside risks: (i) robust subscriber growth in the Unifi segment / lowerthan-expected decline in the number of Streamyx subscribers; and (ii) stronger-than-expected quarterly earnings from further cost optimisation / higher revenue contributions from other businesses. Downside risks are: (i) a sharp decline in the number of Streamyx subscribers / low growth in Unifi subscribers due to higher competition; (ii) major changes in TM’s senior management; and (iii) higher-than-expected capex commitment / opex.

Source: Affin Hwang Research - 29 Aug 2019