Results

• Higher earnings – TM’s 2Q19 reported net profit grew 12% YoY to RM114m while normalized PATAMI increased 46% YoY to RM227m despite falling revenue.

• Revenue declined - 2Q19 revenue decreased 6% YoY to RM2.77b as declines in Voice (-5% YoY to RM656m), Internet (- 10% YoY to RM968m) and Others (-23% YoY to RM466m) overshadowed higher revenue in Data (+21% YoY to RM679).

• Lower QoQ – 2Q19’s reported net profit tumbled 63% QoQ while normalised PATAMI dropped 24% QoQ due to higher operating costs and RM124m of impairment of fixed network assets. Quarterly revenue was flat at -0.4% QoQ following declines in Internet (-1% QoQ), Voice (-3% QoQ) while Data grew 2% QoQ and Others added 1% QoQ.

• Positive 1H19 – 1H19 reported net profit surged 63% YoY to RM423m while normalized PATAMI doubled to RM523m mainly due to the structural cost cutting in 1Q19 while earnings seem to have normalized in 2Q19.

• Continuous subscriber churn – Total broadband subscribers dropped 6% YoY and 1.5% QoQ to 2.16m as UniFi subscribers grew 10% YoY and 1.2% QoQ to 1.34m but was unable to compensate for decline in Streamyx subs which declined 24% YoY and 6% QoQ to 0.82m.

• Slightly lower ARPU– TM’s Average Revenue Per User (ARPU) for Streamyx broadband was flat at RM86 (vs RM87 in 1Q19) while ARPU for UniFi decreased to RM177 vs RM179 in 1Q19 due to new subscribers with lower priced plans.

• Higher gearing – Net debt/EBITDA increased to 1.8x (from 1.57 in 1Q19) despite higher cash reserves of RM3.1b vs RM2.8b in 1Q19. No dividend is expected until end-FY19.

Earnings Outlook/Revision

• Within expectation – 1H19 normalized PATAMI achieved 44% of our full year estimate of RM1.2b while six months’ revenue was within expectation after achieving 46% of our FY19 forecast of RM12b.

• Estimates maintained – We are keeping our revenue and EPS forecast for FY19 and FY20. We expect earnings growth will continue to be supported by ongoing cost optimization amid challenges on the topside.

Valuation & Recommendation

• Downgrade to HOLD with an unchanged target price of RM4.00 based on DCF after share price appreciated. Potential catalysts could come from sale of non-core assets such as its subsidiary VADS and office buildings.

Source: JF Apex Securities Research - 29 Aug 2019