Telekom Malaysia (TM)’s 1H16 results came in within expectations with a 9.3 sen dividend announced as anticipated. Post-results review, we lowered our FY16E/FY17E earnings by 4.6%/1.0%, after raising the finance cost and some fine-tuning. Maintain OUTPERFORM with an unchanged target price of RM7.20 based on targeted FY17E EV/forward EBITDA of 7.9x, representing an unchanged +1.0x SD above its 4-year mean. We like TM for: (i) the less competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion.

Within expectation. 1H16 core PATAMI of RM371m (-10% YoY) came in within expectations at 41%/42.4% of our/street’s full-year estimates. Note that the normalized PATAMI was derived after adding unrealized forex loss of RM13m arising from international trade settlement but stripping off RM49.2m fair value changes in its Webe (previously known as P1) investment, RM14.6m unwinding of discount on put option over shares of a subsidiary and unrealized forex gain of RM69.8m in long-term loans. The latest 1H results are well within the historical 1H contribution of 40-46% range of full-year results for the past five years. Webe contributed RM105m (2Q16: RM52.8m) turnover to TM in 1H16 but continued to suffer a loss with RM290m (2Q16: -RM166m) at the EBIT level. Stripping off P1 contribution, 1H16 turnover would have grown 5.5% YoY (to RM5.8b) with a 30% YoY increase (to RM865m) at the EBIT level.

Declared an interim dividend of 9.3 sen (1H15: 9.3 sen), as expected. For the full financial year, we expect TM to declare 21.2 sen, translating into a dividend yield of 3.1%. TM’s dividend policy remains unchanged at RM900m or 90% of normalised net profit, whichever is higher.

YoY, 1H16 revenue went up by 5% to RM5.9b, due to higher segmental contribution from Data (+9% to RM1.3b), Internet (+8% to RM1.8b) and other revenue, which comprises other telco and non-telco-related services (+10% to RM1.1b). Its Voice revenue segment, meanwhile, softened to RM1.7b (-3%) due to decrease in usage and DEL customers at Mass Market & Managed Accounts. EBITDA, meanwhile, improved to RM1.9b (+5.6%) in tandem with the top line growth with margin remaining steady at 31.4% (vs. 31.3% a year ago).

QoQ, 2Q16 turnover advanced by 6.7%, thanks to higher contribution from all services except the Voice division (-3% to RM823m). EBIT, however, remained flat at RM281m after incurring RM63.4m accelerated depreciation and write-off of WiMAX assets of Webe. Its core PATAMI, meanwhile, deteriorated by 18% to RM167m, due mainly to the higher finance cost and foreign exchange losses.

Unifi subscribers grew by 3% QoQ (or 23k net adds) to 900k at the end of 1H16, representing a take-up rate of c.43%. Its blended ARPU, meanwhile, improved to RM194 (1Q16: RM192). Streamyx’s subscribership, on the other hand, saw net adds lower by 19k to 1.47m with a stable ARPU of RM89. As at 1H16, more than 60% of TM’s 2.37m total broadband customers were subscribed to 4Mbps and higher packages (of which 60% of its Unifi customers opts for 10Mbps and above plans).

Outlook. TM is maintaining its headline KPIs for FY16 consisting of (i) annual revenue growth of 3-3.5% with normalized EBIT maintained at FY15 level (at c.RM1.52b), and (ii) Capex/revenue ratio is expected to stay at 25% to 30% in FY16 (or 30-35% if include Webe). Note that, these headlines KPIs exclude Webe, HSBB2, SUBB and other mega projects.

Webe updates. Management is aiming to make its mobile services available for public by 4Q16. Capex-wise, TM is targeting to spend c.RM1.2b over the next three years, of which we estimate c.600m-RM700m is likely to be spend in FY16 to further extend its coverage to the states’ capital. For the full financial year, we expect Webe to record RM211m turnover with a loss of RM400m at the EBIT level.

Source: Kenanga Research - 1 Sep 2016