FY17 results came in within expectations, the dividend as well. TM is set to continue refining its execution strategy on accelerating convergence and empowering digitisation. Post- review, we raised our FY18E earnings by 2%. Maintain OUTPERFORM with an unchanged DCF-driven TP at RM6.85.

Within expectations. FY17 core PATAMI of RM863m (+2% YoY) came in within expectations at 103%/101% of our/street’s full-year estimates. Note that core PATAMI was derived after adding RM83.5m unrealized forex loss on international trade settlement, RM32.1m unwinding of discount on put option on shares of a subsidiary as well as removing RM7.6m fair value changes and RM174.5m unrealized forex gains on long-term loans. As expected, a second interim single-tier dividend of 12.1 sen per share was declared, bringing the full-year DPS to 21.5 sen, implying a pay-out ratio of 93.6%.

YoY, FY17 revenue inched higher by 0.2% to RM12.1b, due to higher segmental contribution from the Internet and multimedia services as a result of higher Unifi mobile customer base coupled with higher take-up on Unifi TV Premium Channels. EBITDA, meanwhile, dipped by 6% due to higher OPEX that was mainly driven by taller network (relating to Unifi mobile), maintenance costs and other operating costs. QoQ, turnover increased by 9% in 4Q17 due to higher revenue from all services. Its PATAMI, meanwhile, advanced 31% as a result of higher foreign exchange gain. On a normalized basis, its core PATAMI was up by 9%, in tandem with the top-line performance.

Unifi mobile (or Webe previously) has achieved 9.8% penetration (of 2.73m TM households) in 4Q17, implying a subscriber base of more than 267k (vs. 216k or 8.0% penetration rate in the preceding quarter). The group saw strong customer traction in the home and mobile space followed the recent launchings of unifi Mobile #BEBAS and mobile@unifi app during the quarter.

Unifi subscribers grew by 6% QoQ (or 64k, the highest net adds since launching) to 1.13m in 4Q17 while Broadband (previously known as Streamyx) subscribership dipped 6% QoQ to 1.21m. Unifi blended ARPU, meanwhile, was lower by RM2 to RM197 despite the take-up rate for its higher-speed plan (10Mbps & above) increasing to 98% (vs. 94% in the preceding quarter), which we believe was largely driven by the free speed upgrade and Bonanza campaign.

Introduced FY18 KPIs. TM has introduced its FY18 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 projects rollouts) with normalized EBIT maintained at FY17 level (at c. RM1.1b). The EBIT margin pressure is expected to come from broadband, HSBB2 and SUBB project rollouts. Capex/revenue ratio, meanwhile, is expected to come in at mid-to-high twenties. 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 FY20.

Accelerating convergence. To accelerate convergence, the group has consolidated its service brands into a single identity in FY17. Moving forward, TM foresees sustainable performance in FY18, despite competition and challenges. This is driven by the new execution model which priorities its plans towards delivering relevant converged digital lifestyle services and end-to-end business solutions to all its customers.

Raised FY18E core PATAMI by 2% after fine-tuning. Besides, we also take this opportunity to introduce our FY19E numbers, where we expect the group’s core PATAMI to grow 2% YoY to RM873m on the back of higher turnover growth (+4.6% YoY). Maintain OUTPERFORM call on TM (due to: (i) less competition in its fixed-line broadband business, and (ii) its inroad to become a convergence champion) with an unchanged DCF-driven target price at RM6.85 (WACC: 7.2%; TG: 1.0%).

Source: Kenanga Research - 28 Feb 2018