Period  1Q14

Actual vs. Expectations

 1Q14 core PATAMI of RM185.3m (-21% YoY) came in within expectations and accounted for 20.4% and 20.2% of our as well as the street full-year FY14 estimate, respectively. Note that 1Q is generally a seasonally weak quarter which historically accounted for 19.3%-22.5% of its full-year results for the past three financial years. The lower core PATAMI on a year-on-year basis was mainly due to expiry of tax incentives in September 2013.

Dividends  No dividend was announced during the quarter.

Key Results Highlights YoY, 1Q14 revenue climbed by 8% to RM2.6b, driven by the higher segmental contribution from the Data (+4% to RM606m), Internet (+13% to RM726m) and other revenue, which comprises other telco and nontelco related service (+30% to RM414m). Its Voice segment, meanwhile, was flat at RM874m. The group’s EBIT grew by 6% to RM316m due to higher other operating income arising from the negative goodwill on P1 acquisition. Its capex/revenue ratio was also reduced to 7.7% from 9.7% a year ago.

 QoQ, 1Q14 turnover dropped by 12% primarily due to lower revenue from all services except the Internet segment. Its PATAMI, meanwhile, dipped by 39% to RM211m on higher tax charges following the absence of HSBB-related tax incentives.

 Unifi’s subscribers grew by 3% QoQ (or 18k net adds) to 653k at the end of 1Q14 (4Q13: 635k) with a higher blended ARPU of RM188 (4Q13: RM185) as a result of the higher take-up rate for its higher-end packages, Hypp TV content and value-added services. To date, Unifi’s subscribers have reached more than 665k, which implied a take-up rate of c.43%.

 Streamyx’s subscribership, on the other hand, saw net adds reduced by 2k to 1.58m but with a better ARPU of RM86 (4Q13: RM85) driven mainly by higher take up rate in its higher-end package.

Outlook  Data and broadband will continue to be the key driver for growth in FY14. There is no change in management’s FY14 earnings guidance, where the group target to achieve an annual revenue and EBIT growth rate of 5%-5.5% and 5%, respectively.

Change to Forecasts We have raised our FY14E (+0.2%) and FY15E (+0.8%) core NPs marginally after fine-tuning and taking management latest earnings guidance into consideration.

Rating Raised to OUTPERFORM

Valuation  Raised TP to RM6.74 (from RM6.00 previously) after rolling over the valuation base year to FY15 with a slightly higher targeted FY15 EV/forward EBITDA of 7.0x (vs. 6.9x previously), representing a 1.0x standard deviation above the mean of 3-year EV/forward EBITDA band.

Risks to Our Call    Regulation risk and persistent margin pressure.

Conference call highlights

Higher-end broadband package continues to gain traction. Management indicated that its 8Mbps Streamyx package offered in non-Unifi areas recorded strong 42% QoQ growth in 1Q14, lifted its ARPU to RM86 from RM82 a year ago. With that inspirational growth, 43% (or about 1m) of the group current broadband customers are now subscribing to the high-speed broadband packages of 4Mbps and above. As for the Unifi segment, about 90% of its 1Q14 subscribers (or 653k) are still attached to the 5Mbps package, suggesting plenty of rooms for upgrade. Meanwhile, TM also indicated that the group has seen a higher subscription trend for HyppTV content in 1Q14, which helped to drive its ARPU to RM188 from RM178 a year ago (4Q13: RM185).

HSBB 2 updates. There is no solid progress on the HSBB2 project given the discussion with the authority is still on-going. Nevertheless, management highlighted that the HSBB 2 project will be focused on the state capitals. To recap, the government has announced a combination of RM3.4b broadband investment to roll out fibre links (HSBB) for both the urban and suburban areas under the Budget 2014. For the urban areas, we understand that the authority intends to collaborate with the private sector, involving an investment of RM1.8b to increase the internet speed to 10 Mbps which will benefit up to 2.8m households nationwide. Meanwhile, the HSBB network will also be expanded to suburban areas with internet access speed increased to between 4-10 Mbps, and benefiting 2m consumers at a cost of RM1.6b.

FY14 and FY16 KPIs remain unchanged. TM is maintaining its FY14 headline KPIs guidance, where the group is targeting an annual revenue growth of 5.0%-5.5%; EBIT growth of 5%; and customer satisfaction index of 72. Meanwhile, the group is also keeping its FY16 KPIs, where TM is targeting to achieve 6% revenue growth; EBIT growth of 8% and customer satisfaction index of 72. As for the FY15 KPIs, we understand that management had earlier announced during the 4Q12 result last year where the group expects its revenue to grow by 6% YoY and 8% YoY increase in the EBIT level.

P1 partnership updates. TM has on last Friday submitted the detailed business plan in relation to the requisite spectrum to MCMC for its approval and remains hopeful to complete the exercise by 3Q14. Management believes that through P1, TM can expand its capabilities into wireless broadband space more efficiently and enabling the group to provide a complete portfolio of services to its valued customers. The group also believes the partnership has laid the foundation for the development of a new LTE platform and opening up possibilities for TM to deliver fully integrated high-quality internet, data and application across all market segments.

Proposed dividend reinvestment scheme (DRS) price set at RM5.38. On a separate announcement, the group has set the new TM shares under the DRS at RM5.38 per share. The issue price represents a discount of RM0.59 or c.9.9% to the theoretical exdividend VWAMP of approximately RM5.97, which was arrived at after taking into consideration the 5-day VWAMP up to and including 8 May 2014, being the last trading day prior to the price fix date of approximately RM6.13 per share and the dividend per share of 16.3 sen per TM share. The last date and time to submit the DRF have been set on 11 June 2014 at 5.00pm. Both payment of cash dividend to shareholders as well as the issuance and allotment of new TM shares are set at 23 June 2014.

Source: Kenanga