Despite Telekom Malaysia (TM)’s 9M16 results coming in within expectations, we have lowered our FY16E/FY17E earnings by 6%/9%, after taking management’s latest guidance into consideration. No dividend was announced during the quarter, as expected. Maintain OUTPERFORM but with a lower TP of RM6.98 (from RM7.18 previously) based on targeted FY17E EV/forward EBITDA of 8.0x, representing an unchanged +1.0x SD above its 2-year mean. We continued like TM for: (i) the less intense competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion.

In line. 9M16 core PATAMI of RM578m (-10% YoY) came in largely within our/street’s full-year estimate (at 67.4% each vs. 62%-72% of full-year results for the past five financial years). Note that the normalized PATAMI was derived after adding unrealized forex loss of RM37.4m arising from long-term loans & international trade settlement; RM3.3m fair value changes; and RM7m unwinding of discount on put option on shares of a subsidiary. No dividend was announced during the quarter. For the full financial year, we expect TM to declare 19.8 sen (9M16: 9.3 sen), translated into a dividend yield of 3.2%.

YoY, 9M16 revenue improved by 4% to RM8.8b, due to higher segmental contribution from all segment, except Voice (-6%), no thanks to decreased STD & IDD traffic minutes as well as lower customer base at Mass Market and Managed Accounts. EBITDA, meanwhile, was flat at RM2.8b due to higher direct costs and other operating expenses while margin inched higher by 40 ppt to 31.8%. EBIT, however, dipped by 13% as a result of higher D&A (+7%). Its core PATAMI, deteriorated by 10%, due mainly to unrealized forex gain (vs. higher forex loss of RM125m in 9M15). QoQ, group’s turnover weakened by 4% in 3Q16 primarily due to lower revenue from telecommunication-related services, data and voice. Its core PATAMI, however, soared 24% as a result of higher EBIT (on the back of lower D&A) and unrealized forex losses on international trade settlement (vs. gain in 2Q16). Unifi subscribers grew by 2% QoQ (or 21k net adds) to 921k at the end of 9M16, representing a take-up rate of c.43%. Blended ARPU, meanwhile, improved 1.5% QoQ to RM197 as a result of encouraging take-up on its higher speed plan as well as valued-added services. Streamyx’s subscribership, on the other hand, saw net adds lower by 20k to 1.45m with a higher ARPU of RM90. As at 9M16, more than 62% of TM’s 2.37m total broadband customers were subscribed to 4Mbps and higher packages (of which 75% of its Unifi customers opt for 10Mbps and above plans).

FY16 KPIs remain unchanged. TM is maintaining its headline KPIs for FY16, consisting 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 come in at the lower-end of its targeted 25% to 30% in FY16 (or 30-35% if Webe is included). Note that, these headlines KPIs exclude Webe, HSBB2, SUBB and other mega projects.

Webe updates. Following the official launch in mid-Aug, TM has turned more conservative and reluctant to share more colours on its 3Q16 performance, which we reckon was partially due to competitive reason. Nevertheless, based on our back-of-the envelop calculations, we estimated that Webe should have recorded a sequential flattish revenue of RM53m but with lower EBIT loss of c.RM100m-RM110m as a result of lower accelerated depreciation and write-off of its WIMAX assets (3Q16: RM29m vs. 2Q16: RM63m). For the full financial year, we expect Webe to record RM157m turnover with loss of RM395m at the EBIT level.

Tweaked FY16E/FY17E core PATAMI by -6%/-9%, after fine-tuning and imputing: (i) higher marketing expenses and manpower costs, and (ii) higher effective tax rate.

Source: Kenanga Research - 28 Nov 2016