Telekom Malaysia (TM)’s 1Q16 results came in within expectations with no dividend announced as anticipated. Post-results review, we raised our FY16E/FY17E earnings by 0.6%/0.3%, after some fine-tuning. Raise stock rating to OUTPERFORM with a higher target price of RM7.20 (from RM6.92, previously) after rolling over valuation base year to FY17E. Our TP is based on targeted FY17E EV/forward EBITDA of 7.8x, representing an unchanged +1.0x SD above its 4-year mean.

In-line. 1Q16 core PATAMI of RM195m (9.6% YoY) came in within expectations at 21.8% of both our and the market consensus’ full-year estimates. Note that, the normalized PATAMI was derived after adding unrealized forex loss of RM27.8m arising from international trade settlement but stripping off RM50.3m fair value changes in its Webe (previously known as P1) investment and unrealized forex gain of RM104.5m in long-term loans. The latest quarter results are well within the historical 1Q contribution of 19.2%- 22.6% range of full-year results for the past five years. Webe has contributed RM51.9m turnover to TM in 1Q16 but continued to suffer a loss with RM124m at the EBIT level. Stripping off P1 contribution, 1Q16 turnover would have grown 3.6% YoY (to RM2.8b) with 13.5% YoY increase (to RM333m) at the EBIT level.

No dividend was announced during the quarter. For the full financial year, we expect TM to declare 21.7 sen, translated into a dividend yield of 3.3%. YoY, 1Q16 revenue climbed by 3% to RM2.86b, driven by the higher segmental contribution from Data (+1% to RM636m), Internet (+8% to RM894m) and other revenue, which comprises other telco and non-telcorelated services (+3% to RM476m). Its Voice revenue segment, meanwhile, declined marginally to RM849m (-1%) due to lower voice revenue at mass market and managed accounts. Reported EBIT was enhanced by 15% to RM280m due to better cost management, where total cost to revenue was lowered to 90.3% vs. 91.3% a year ago.

QoQ, 1Q16 turnover dipped by 10%, primarily due to lower contribution from all services except the Internet division (4% to RM894m) due to higher Unifi revenue as a result of larger customer base. Its core PATAMI, meanwhile, deteriorated by 25% to RM195m, in view of the absence of MESRA programmes, which boosted the group’s 4Q15 core PATAMI by RM58.8m. Unifi subscribers grew by 1% QoQ (or 38k net adds) to 877k at the end of 1Q16, representing a take-up rate of c.44%. Its blended ARPU, meanwhile, improved to RM192 (4Q15: RM190). Streamyx’s subscribership, on the other hand, saw net adds lowering by 14k to 1.509m with a stable ARPU of RM89. As at 1Q16, 59%/53% of TM’s 2.36m total broadband customers were subscribed to 4Mbps/10Mbps and higher packages.

Outlook. TM is maintaining its headline KPIs for FY16, consisting of annual revenue growth of 3%-3.5% with normalized EBIT maintained at FY15 level (at c.RM1.52b). Capex/revenue ratio, meanwhile, is expected to stay at 25% to 30% in FY16. Note that, these headlines KPIs exclude Webe, HSBB2, SUBB and other mega projects.

Webe updates. Management remains hopeful to commercially launch its mobile services by mid-FY16 to complete its fixed-mobile convergence service. Webe has successfully completed user trials for broadband, voice and SMS services under its c.1.5k LTE sites with network coverage in major cities (i.e. Johor, Klang Valley and Penang). For the full financial year, we expect Webe to record RM211m turnover with a loss of RM278m at the EBIT level. 

Source: Kenanga Research - 26 May 2016