TM plans to refine its execution strategy on accelerating convergence and empowering digitisation. While we concur with its strategies, margins pressure is expected to emerge should the new business approach entails more and lengthy gestation periods. Post review, we reduced our FY17E/FY18E earnings estimate by 2%/3%, respectively. Maintain MARKET PERFORM call with a lower DCF-driven TP of RM6.70 (WACC: 7.0%; TG: 1.0%).

Within expectations. 1H17 core PATAMI of RM438m (+18% YoY) came in within expectations at 54%/51% of our/consensus full-year estimates due mainly to higher revenue and higher unrealized forex losses on international trade settlement. Note that, core PATAMI was derived after adding RM49.6m unrealized forex loss on international trade settlement; RM16m unwinding of discount on put option on shares of a subsidiary; RM4.0m fair value changes as well as removing RM72.7m unrealized forex gains on long-term loans. An interim dividend of 9.4 sen (1H16: 9.3 sen) was declared, as expected.

YoY, 1H17 revenue inched higher by 0.7% to RM5.95b, due to higher segmental contribution from the Internet and multimedia and other telecommunication related services. EBITDA, meanwhile, dipped by 4% due to higher manpower and supplies & materials costs. QoQ, group’s turnover improved marginally by 0.5% in 2Q17 due to higher revenue from all services except for the Voice segment. Its core PATAMI, meanwhile, dipped 9.5% as a result of higher OPEX, which included impact from foreign exchange on trade settlement. Unifi subscribers grew by 3% QoQ (or 28k net adds) to 1.0m in 2Q17 while Streamyx’s subscribership dipped 3% QoQ to 1.35m. Unifi blended ARPU, meanwhile, was lower by RM1 to RM200 despite the take-up rate for its higher-speed plan (10Mbps & above) increasing to 88% (vs. 81% in the preceding quarter), which we believe was largely driven by the current free speed upgrade campaign.

Webe updates. Webe has achieved 5.6% penetration of 2.7m TM households as of end-2Q17, implying a subscriber base of 151k (vs. 113k or 4.2% 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.

Introduced a new business plan – “Perfexe 10” to accelerate convergence and empower digitization to optimize processes as well as productivity. Besides, TM is also set to expedite its fiber roll-out and expand its reach to on-going capital investments (i.e. high-rise buildings). In addition, the group is also working towards liberating its 11k WiFi access points to strengthen the mobility presence. All in, while we concur with management’s digital initiative, the upcoming battle in the high-rise buildings may put TM in a relatively handicap position in view of the higher value proposition offered by its key rival – TIME. Group margins are expected to be under pressure should TM matches its rivals’ offering.

FY17 KPIs remain unchanged but…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 following the HSBB2 & SUBB roll-outs) 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 roll-outs. ….may likely fail to meet its top-line target given the frail turnover growth (+0.7% YoY) in 1H17. Besides, the group may also face some pressures on margins over the short-to-medium term should the new business approach entails more gestation periods from new investments.

Reduced FY17E/FY18E core PATAMIs by 2%/3% on the back of lower turnover and higher marketing cost assumptions. In addition, we also raise our WACC assumptions to 7.0% (vs. 6.8% previously) to reflect higher earnings risk ahead. All in, we have revised our DCF-driven TP to RM6.70 from RM7.10 previously.

Source: Kenanga Research - 30 Aug 2017