9M17 results came in within the street's expectation, but above that of ours. No dividend was declared, as expected. TM is set to continue to refine its execution strategy on accelerating convergence and empowering digitisation. Post- review, we raised our FY17E/FY18E earnings estimate by 6% each. Upgrade to OUTPERFORM with higher DCF-driven TP of RM6.75.

Above our expectation. 9M17 core PATAMI of RM643m (+11% YoY) came in within the street but above our expectations at 75%/81% of full- year estimates. The key culprit on our end was mainly due to the lower- than-expected net finance costs. Note that core PATAMI was derived after adding RM58.3m unrealized forex loss on international trade settlement; RM24.0m unwinding of discount on put option on shares of a subsidiary; RM5.9m fair value changes as well as removing RM99.6m unrealized forex gains on long-term loans. No dividend was declared, as expected.

YoY, 9M17 revenue inched higher by 0.7% to RM8.9b, due to higher segmental contribution from the Internet and multimedia services. EBITDA, meanwhile, dipped by 5% due to higher OPEX that was mainly driven by taller network (relating to Unifi mobile), manpower (increase in staff benefits) and other operating costs. QoQ, group turnover was lowered by 1.3% in 3Q17 due to higher revenue from all services except for the Voice and Others segments. Its core PATAMI, meanwhile, dipped 2.2% as a result of higher OPEX and lower impact from foreign exchange on trade settlement.

Unifi subscribers grew by 6% QoQ (or 55k, the highest net adds since 2Q12) to 1.06m in 3Q17 while Broadband (previously known as Streamyx) subscribership dipped 5% QoQ to 1.29m. Unifi blended ARPU, meanwhile, was lower by RM1 to RM199 despite the take-up rate for its higher-speed plan (10Mbps & above) increasing to 94% (vs. 88% in the preceding quarter), which we believe was largely driven by the free speed upgrade campaign.

Unifi mobile (or Webe previously) has achieved 8% penetration (of 2.7m TM’s households) earlier than expected (vs. 8%-10% by year-end) in 3Q17, implying a subscriber base of more than 216k (vs. 151k or 5.6% penetration rate in the preceding quarter). The group, however, has deferred its new prepaid mobile plan launching to January 2018 (from previously guided 2H17). While management is reluctant to share further details, we do not discount that the group could potentially bundle its mobile service (with minimal top-up fee) or even provide an option to existing Unifi’s subscribers to replace the land line with mobile services.

FY17 KPIs remain unchanged but top-line targets may not be achieved. TM is maintaining its FY17 KPIs which targets annual revenue growth of 3.5-4% with normalized EBIT maintained at FY16 level (at c.RM1.2b, where the margin pressure is expected to come from broadband, HSBB2 and SUBB projects roll-outs). In view of the frail turnover growth (+0.7% YoY) in 9M17, we believe it’s a tall order for the group to achieve the top- line target.

Accelerating Perfexe 10 strategies to accelerate convergence and empower digitization to optimize processes as well as productivity. Besides, TM is also set to continue to expedite its fiber roll-out and expand reach to on-going capital investments (i.e. high-rise buildings) and liberating its WiFi access points (where TM has connected to over 7k wifi@unifi hotspots across Malaysia) to strengthen the mobility presence. All in, while we concur with management’s digital initiative, the 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.

Raised FY17E/FY18E core PATAMI by 6% each after lowering some OPEX and the net finance cost assumptions. All in, we have revised our DCF-driven TP to RM6.75 (WACC: 7.0%; TG: 1.0%) from RM6.70 previously and upgraded the stock rating to OUTPERFORM as the recent share price weakness could provide bargain hunting opportunities.

Source: Kenanga Research - 23 Nov 2017