Telekom Malaysia (“TM”) is keeping its FY17 KPIs unchanged despite posting a strong-than-expected 1Q17 result. No dividend was announced during the quarter, as expected. Post review, we have raised our FY17/FY18E earnings estimate by 2% each. Maintain OUTPERFORM call with higher DCF-driven TP of RM7.10 (from RM7.03 previously). We continue to 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. 1Q17 core PATAMI of RM230m (+13% YoY) came in above expectation at 29%/28% of our/consensus full-year estimate due mainly to higher revenue, lower-than-expected OPEX as well as lesser forex fluctuation. Note that, the core PATAMI was derived after adding RM9.2m unrealized forex loss on international trade settlement; RM8m unwinding of discount on put option on shares of a subsidiary, RM4.9m fair value changes as well as removing RM22.7m unrealized forex gained on long-term loans. No dividend was announced during the quarter, as expected.

YoY, 1Q17 revenue up by 4% to RM2.97b, due to higher segmental contribution from all segments, except Voice (-5%), no thanks to the decreased traffic minutes and lower bilateral revenue across all customer clusters. EBIT, meanwhile, improved by 9% due to higher revenue coupled with lower operating costs. Its core PATAMI, advanced by 13%, mainly due to lower unrealized forex gains on its long-term loans. QoQ, group’s turnover reduced by 8% in 1Q17 due to lower revenue from all services except for the Internet segment. Its core PATAMI, meanwhile, dipped 15% as a result of a smaller unrealized forex loss (vs. a gain of RM121m in 4Q16). Unifi subscribers grew by 3% QoQ (or 30k net adds) to 979k in 1Q17 while Streamyx’s subscribership dipped 2% QoQ to 1.4m. Unifi blended ARPU, meanwhile, stayed at RM201 despite the take-up rate on its higher-speed plan (10Mbps & above) increased to 81% (vs. 79% in the preceding quarter), which we believe was largely driven by the current free speed upgrade campaign.

FY17 KPIs remain unchanged. Despite having a strong 1Q performance, TM is maintaining 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 retain at low 30%s (of which c.RM1.1b is likely set to be allocated to the HSBB2 project, based on our estimate). Note that, these headlines KPIs include Webe performance.

Webe updates. Webe has achieved 4.2% penetration of 2.69m TM’s households as of end-1Q17, implying a subscriber base of 113k (vs. 53k or 2% penetration rate in the preceding quarter). The group is targeting to launch its prepaid services in 2H17 and aims to achieve 8%-10% penetration rate by year-end. TM remains hopeful to turn around Webe’s EBITDA to positive territory in 2-3 years.

Raised FY17/FY18E core PATAMI by 2% each on the back of lower: (i) supplies & materials cost assumption, and (ii) interest expenses. Correspondingly, we have raised our DCF-driven TP to RM7.10 (WACC: 6.8%, TG: 1.0%) from RM7.03 previously. Key downside risks to our call includes (i) regulatory risk, (ii) irrational competition; (iii) slower turnaround of Webe’s operation.

Source: Kenanga Research - 24 May 2017