Results

• Improved earnings – TM’s reported net profit almost doubled YoY to RM308.3m in 1Q19 due to lower operational cost and MFRS16 adoption while normalized PATAMI jumped over 100% YoY to RM296.4m.

• Lower revenue - 1Q19 revenue dropped 2.4% YoY to RM2.84b as declines in Voice (-11% YoY to RM674.3m) and Internet (- 3.5% YoY to RM977.1m) overshadowed higher revenue in Data (+7.2% YoY to RM665.6) and Others (+1.8% YoY to RM461.9m).

• Higher QoQ – 1Q19’s reported net profit surged over 300% QoQ from 4Q18 while normalised PATAMI jumped over 100% QoQ thanks to lower operating cost. Quarterly revenue declined 10% QoQ following declines in Internet (-2% QoQ), Voice (- 16.6% QoQ) and Others (-24.8% QoQ) while Data was flat.

• Rise in margins – TM’s opex/revenue ratio decreased by 11.4pp to 82.7% mainly due to lowering of direct costs and other opex by 32% QoQ and 34% QoQ respectively. As a result, EBITDA margin increased to 38.6% from 29.8% in 4Q18.

• Continuous subscriber churn – Total broadband subscribers dropped 5.2% YoY and 1.7% QoQ to 2.19m as UniFi subscribers grew 12.4% YoY and 1.9% QoQ to 1.32m but was unable to compensate for decline in Streamyx subs which declined 22.8% YoY and 6.8% QoQ to 0.87m.

• Lower ARPU– TM’s Average Revenue Per User (ARPU) for Streamyx broadband was flat at RM87 (vs RM88 in 4Q18) while ARPU for UniFi decreased to RM179 vs RM184 in 4Q18 due to new subscribers with lower priced plans.

• Improved gearing – Cash reserves was flat at RM2.8b. As a result of MFRS16 adoption, net debt/EBITDA improved to 1.57x (from 1.75 in 4Q18) after reclassification of lease liabilities.

Earnings Outlook/Revision

• Above expectation – 1QFY19 normalized PATAMI achieved 37% of our full year estimate of RM792m while three months’ revenue was within expectation after achieving 23% of our FY19 forecast of RM11.99b.

• Estimates maintained – We are keeping our revenue but raising our EPS forecast for FY19 and FY20 by 51% and 49% respectively due to the lower cost base.

Valuation & Recommendation

• Upgrade to BUY from HOLD with a higher target price of RM4.00 (previously RM3.06) based on DCF. Potential catalysts could come from sale of non-core assets such as its subsidiary VADS and office buildings.

Source: JF Apex Securities Research - 31 May 2019