Period  3Q14/9M14

Actual vs. Expectations 9M14 core PATAMI of RM591m (-21.1 YoY) came in below expectations, and accounted for 66.0% of our, and 64.6% of the street’s, full-year estimates.

 The key negative variance on our end was mainly due to higher-than-expected operating costs where its 9M14 cost/revenue ratio increased to 88.2% vs. 87.2% a year ago.

Dividends  No dividend was declared during the quarter.

Key Results Highlights YoY, 9M14 revenue climbed by 6% to RM8.1b, driven by the higher segmental contribution from the Data (+1% to RM1.8), Internet (+10% to RM2.2b) and other revenue, which comprises other telco and non-telco related services (+30% to RM1.5b). Its Voice segment, meanwhile, declined to RM2.6b (-5%). The group’s EBIT dipped by 3% to RM965m due to higher OPEX on bad debt (due to tighter credit treatment policy), manpower (due to higher staff benefit and salary) and maintenance cost (due to higher customer projects). Its capex/revenue ratio, meanwhile, was lowered to 11.7% from 14.5% a year ago given that some of the customer projects have been delayed to FY15.

 QoQ, 3Q14 turnover declined by 7%, primarily due to lower revenue from all services except non-telco related services. Its core PATAMI, meanwhile, dipped by 11% to RM192m on lower EBIT as well as forex translation loss.

 Unifi’s subscribers grew by 4% QoQ (or 27k net adds) to 700k at the end of 3Q14 with a slightly higher blended ARPU of RM189 (2Q14: RM187). To date, Unifi’s subscribers have reached more than 712k, which implied a take-up rate of c.45%.

 Streamyx’s subscribership, on the other hand, saw net adds lowered by 38k to 1.51m with a lower ARPU of RM81 (2Q14: RM85), no thanks to the database cleanup exercise. The clean-up has impacted its 3Q14 customer number by c.90k. As at 9M14, 48% (or >1m) TM’s total broadband customers are subscribing to 4Mbps and higher packages.

Outlook  Data and broadband will continue to be the group key driver for growth moving forward. There is no change in management’s FY14 revenue guidance (at 5%-5.5%) but believe its 5.0% YoY EBIT growth target is challenging in view of the higher OPEX ahead. Meanwhile, TM has lowered its targeted capex/revenue ratio, again, to 18% (from 20% previously) as some customer projects have delayed to CY15.

Change to Forecasts  We have cut our FY14E (-12.2%) and FY15E (-3.7%) core NPs after raising our OPEX (manpower, maintenance costs, and depreciation & amortisation expenses) assumptions.

Rating Downgraded to MARKET PERFORM

Valuation  In tandem with our lower earnings forecast, we have cut our TM target price to RM6.92 (from RM7.10 previously) based on targeted FY15 EV/forward EBITDA of 7.7x (+1.5x standard deviation above its 4-year mean).

Risks to Our Call Regulation risk and persistent margin pressure.

Source: Kenanga