Results

• Lower earnings – TM’s 1Q20 reported net profit dropped 51% YoY to RM153m while normalized PATAMI declined 19% YoY to RM241m as sales dropped due to COVID-19 affected operations.

• Revenue decline – 1Q20 revenue declined 8% YoY to RM2.56b as higher revenue from all segments declined: Data (-4.6% YoY to RM635m), Voice (-19.3% YoY to RM544m), Internet (-4.2% YoY to RM936m) and Others (-4.3% YoY to RM442m).

• COVID-19 impact - Revenue was negatively impacted by COVID-19 as TM was unable to carry out installation, network and service restoration activities during the MCO.

• Improved QoQ profit – TM’s normalised PATAMI of RM241m grew 27% QoQ despite a 16% QoQ revenue decline.

• Steady margins – Normalised PATAMI margin stood at 9% vs 6% in 4Q19 while EBIT margin was steady at 13% vs 12% in 4Q19 due to ongoing cost optimization efforts.

• Arrested subscriber churn – Total broadband subscribers dropped -0.5% YoY and was flat QoQ at 2.18m as UniFi subscribers grew 13% YoY and 3% QoQ to 1.49m to cushion the decline in Streamyx subs which decreased 20% YoY and 6% QoQ to 0.7m.

• Stable ARPUs – TM’s Average Revenue Per User (ARPU) for Streamyx broadband declined to RM91 (vs RM96 in 4Q19) while ARPU for UniFi maintained at RM153.

• Higher gearing – Net debt/EBITDA increased to 1.5x (from 1.4 in 4Q19) amid lower cash reserves of RM4.5b vs RM4.8b in 4Q19 as TM gave allowances.

Earnings Outlook/Revision

• Below expectation – 1Q20 normalized PATAMI achieved 20% of our full year estimate, while three months’ revenue accounted for 22% of our FY20 forecast.

• Guidance withdrawn – Given the uncertain market conditions and consumer behaviour due to the pandemic, the management has withdrawn its 2020 guidance and will revisit when there is better clarity.

• Estimates lowered – We are reducing our revenue and EPS forecast for FY20 by 9% and 17% respectively. We expect earnings to improve in 2H20 as TM resumed Unifi installation only in late-April with other businesses to pick up later.

Valuation & Recommendation

• Downgrade to SELL from HOLD with a lower target price of RM3.97 (previously RM4.00) based on DCF. Potential catalyst is the inclusion of the stock in the FBM KLCI during the mid-year review of the benchmark index’s component stocks.

Source: JF Apex Securities Research - 21 May 2020