Although Telekom Malaysia (TM)’s FY16 results came in above expectations and met all its FY16 KPIs, we have lowered our FY17E earnings by 5%, after reviewing some of our assumptions and taking management’s latest guidance into consideration. Maintain OUTPERFORM but with a lower TP of RM6.80 (from RM6.98 previously) based on targeted FY17E EV/forward EBITDA of 8.0x, representing an unchanged +1.0x SD above its 2-year mean. We like TM for: (i) the less intense competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion.

Above expectations. FY16 core PATAMI of RM848m (-6% YoY) came in above expectation (at 105%/106% of our/consensus full-year estimate) due mainly to the lower-than-expected taxation in 4Q16 as a result of the last mile broadband incentive. Note that the core PATAMI was derived after removing RM16m tax incentives and adding unrealized forex loss of RM48m arising from long-term loans and international trade settlement; RM58m MESRA programme as well as RM29m unwinding of discount on put option on shares of a subsidiary. A second interim dividend of 12.2 sen was declared, bringing the full-year DPS to 21.5 sen (which was c.9% above our earlier estimate based on a targeted 90% pay-out), implied a pay-out ratio of 95.3%.

YoY, FY16 revenue up by 3% to RM12.1b, due to higher segmental contribution from all segments, except Voice (-6%), no thanks to lower bilateral revenue at Global & Wholesale and lower customer base at Mass Market and Managed Accounts. EBIT, however, dipped by 8% as a result of higher D&A (+8%). Its core PATAMI, reduced by 6%, due mainly to lower unrealized forex loss. QoQ, group’s turnover advanced by 11% in 4Q16 due to higher performance from all services. Its core PATAMI, soared 30% as a result of higher unrealized forex losses (vs. a gain in 3Q16). Unifi subscribers grew by 3% QoQ (or 28k net adds) to 949k at the end of FY16, representing a take-up rate of c.43%. Blended ARPU, meanwhile, improved 2% QoQ to RM201 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 27k to 1.42m with a higher ARPU of RM92. As at end-FY16, c.79% of Unifi customers opt for 10Mbps and above plans vs. 75% in the preceding quarter.

Introduced FY17 KPIs. TM has introduced its FY17 KPIs, which targets annual revenue growth of 3.5%-4% (underpinned by its complete quad play services as well as higher Unifi take-up followed the HSBB2 & SUBB projects rollout) with normalized EBIT maintained at FY16 level (at c. RM1.2b). The EBIT margin pressure is expected to come from Webe, HSBB2 and SUBB projects rollout. Capex/revenue ratio, meanwhile, is expected to come in at low 30%s. On top of that, the group also target to achieve 3.5-4.0% annual growth rate at both the revenue and EBIT level in FY19. Note that, these headlines KPIs include Webe performance.

Webe updates. TM remains reluctant to share more colours on Webe performance. Nevertheless, based on our back-of-the envelop calculations, we estimated that Webe should have recorded a relative flattish revenue (of c.RM200m) in FY16 but with higher EBIT loss of c.RM600m (vs. FY15: RM289m) as a result of higher accelerated depreciation and write-off of its WIMAX assets (FY16: RM195m vs. FY15: RM52m) and marketing expenses. Having said that, we understand that TM remains hopeful to turn around Webe’s EBITDA/EBIT to positive territory in 3-5 years.

Trimmed FY17E core PATAMI by 5% on the back of higher: (i) supplies & materials cost assumption, and (ii) interest expenses. Meanwhile, we also raise our FY17 capex to RM3.9b (from RM3.1b previously) to align with management’s guidance. We also take this opportunity to introduce our FY18E numbers.

Source: Kenanga Research - 23 Feb 2017