Period  2Q14/1H14

Actual vs. Expectations 1H14 core PATAMI of RM399m (-17% YoY) came in within expectations, accounted for 46.5% of both our as well as the street full-year estimates. The lower core PATAMI on a year-on-year basis was mainly due to the absence of HSBB tax incentives in 2014.

Dividends  Declared an interim dividend of 9.5 sen (1H13: 9.8 sen). For the full financial year, we expect TM to declare a total DPS of 23.1 sen, translating into a 3.7% yield. Its FY14 DPS (in terms of the absolute amount) is expected to be lower than FY13 in view of the absence of HSBB tax incentive. TM’s dividend policy remains unchanged at RM700m or 90% of normalised net profit, whichever is higher.

Key Results Highlights  YoY, 1H14 revenue climbed by 8% to RM5.4b, driven by the higher segmental contribution from the Data (+5% to RM1.25b), Internet (+13% to RM1.45b) and other revenue streams, which comprises other telco and non-telco related service (+29% to RM971m). Its Voice segment, meanwhile, declined to RM1.8b (-3%). The group’s EBIT grew by 4% to RM654m due to higher other operating income arising from the negative goodwill on P1 acquisition in 1Q14. Its capex/revenue ratio was also reduced to 10.0% from 12.5% a year ago given that some of the customer projects have been

delayed to FY15.

 QoQ, 2Q14 turnover improved by 8% fuelled by higher revenue from other telco related services, voice and data segments. Its core PATAMI, meanwhile, advanced by 16% to RM214m on higher EBIT and the absence of negative goodwill on acquisition of a new subsidiary.

 Unifi’s subscribers grew by 3% QoQ (or 20k net adds) to 673k at the end of 2Q14 with a slightly lower blended ARPU of RM187 (1Q14: RM186). To date, Unifi’s subscribers have reached more than 685k, which implied a take-up rate of c.44%.

 Streamyx’s subscribership, on the other hand, saw net adds increased by 1k to 1.58m but with a lower ARPU of RM85 (1Q14: RM86). As at 1H14, 45% or more than 1m TM’s total broadband customers are subscribing to 4Mbps and higher packages.

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. Nevertheless, TM has lowered its targeted capex/revenue ratio to 20% from 22% previously as some customer projects have delayed to CY15.

Change to Forecasts We raised our FY14E (+0.2%) and FY15E (+0.4%) core NPs marginally after fine-tuning.

Rating Maintained OUTPERFORM

Valuation  Maintaining TM’s target price at RM6.74 based on an unchanged targeted FY15 EV/forward EBITDA of 7.0x, 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.

Source: Kenanga