Results

• Lower earnings - TM’s 1Q18 normalised PATAMI declined 50% YoY to RM115.3m due to higher cost from its Mobile unit and higher tax. Reported PATAMI dropped 27.5% YoY to RM167.1m.

• Decline in revenue - 1Q18 revenue declined 4% YoY to RM2.85b as higher contribution from Internet (+5.2% YoY) was unable to fully offset declines in Data (-5.3% YoY), Voice (-6.3% YoY) and Others (-15.7% YoY). This was due to decline in subscribers and ARPU, lower data usage by public sector, less customer projects and lower tuition fees at its university.

• Lower QoQ – 1Q18 reported PATAMI dropped 40% QoQ while normalised PATAMI tumbled 48% QoQ. Quarterly revenue lost 11% QoQ following decline in most product segments (Internet +0.1%, Voice -5.8%, Data -13% and Others +32.4%).

• Margins eroded – 1Q18 normalised EBITDA margin declined to 27.8% from 28.8% in 4Q17 while normalized PATAMI margin dropped to 4.1% from 6.9% in the previous quarter following higher tax rate and higher operating costs.

• Drop in subscribers – Total broadband subscribers dropped 7.2% YoY and 2.6% QoQ to 2.3m as growth UniFi subscribers of 20% YoY and 4.5% QoQ to 1.18m was unable to compensate for decline in Streamyx subs by -18.8% YoY and -6.5% QoQ to 1.13m.

• Lower ARPU– TM’s Average Revenue Per User (ARPU) for Streamyx broadband was flat at RM90 while ARPU for UniFi declined to RM194 vs RM197 in 4Q17.

• Higher gearing – Cash reserves dwindled to RM1.46b from RM1.72b in 4Q17. As a result, gross debt/EBITDA soared to 2.64x (from 2.31x in 4Q17) and exceeded management’s internal guideline of 2.5x, raising concern on its dividend policy of RM700m or 90% of normalized PATAMI, whichever higher.

Earnings Outlook/Revision

• Earnings below expectation – 1Q18 normalized PATAMI and revenue accounted for 12.3% and 22.5% of our full year estimates respectively.

• Estimates slashed – We are lowering our revenue and EPS forecast for FY18 by 3.5% and 30 % while FY19 estimates are reduced by 4.4% and 14% respectively.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.58 (from RM6.31 previously) based on DDM valuation after reducing dividend assumption to 18.7 sen/share (from 23.8 sen/share).

Source: JF Apex Securities Research - 23 May 2018