1Q18 results came in below expectations due to lower-than- expected turnover and higher OPEX. Moving forward, TM is set to face some operational headwinds with the implementation of the upcoming faster and cheaper broadband plan. Post-review, we slashed our FY18E/19E earnings by 22%/13%. Downgrade to MARKET PERFORM call with lower DCF-driven TP of RM4.35.

Disappointing results. 1Q18 core PATAMI of RM105.3m (-54.2% YoY) came in way below expectations at 12.2% each of our/street’s full-year estimates. The key negative variances on our end were mainly due to (i) lower-than-expected turnover as well as (ii) higher-than-expected OPEX and effective tax. Note that, the core PATAMI was derived after deducting a cumulative RM51.8m that mainly arising from the unrealized forex impact on borrowings and international trade settlements. No dividend was announced during the quarter, as expected.

YoY, 1Q18 revenue declined by 4% to RM2.8b, due to lower voice (less traffic minutes and cumulative customers), data (lower domestic leased bandwidth and other data services) and other telecommunication-related services (lower USP and customer projects revenue contribution), partially mitigated by an increase in internet revenue (thanks to higher customer base as well as higher content). EBITDA, meanwhile, dipped 36% (as a result of higher OPEX that was mainly driven by taller network (relating to Unifi mobile), manpower (higher staff benefits) and maintenance costs) with margin lowered to 26.7% vs. 31.6% a year ago. The lower EBITDA coupled with higher effect taxation led the group’s PATAMI to plunge 54% to RM105m. QoQ, turnover reduced by 11% due to lower contribution from all services. In line with the weak revenue coupled with higher OPEX and taxation, PATAMI was lower by 43% to RM157m in 1Q18.

Broadband - showing signs of weakness operationally. Despite Unifi subscribers base continued to climb (4.5% QoQ or 51k net adds to 1.18m) in 1Q18, the growth is not enough to offset the decline in Streamyx customer base (-6% or to 1.13m). Indeed, the group’s broadband customer base has weakened for four consecutive quarters since 2Q17, which we believe was partially due to better and wider mobile broadband network coverage. Unifi ARPU, meanwhile, softened by RM3 to RM194 despite the take-up rate for its convergence services increasing to 45% (vs. 42% in the 4Q17). Unifi mobile, on the other hand, has achieved 10% (4Q17: 9.8%) penetration of TM households.

Faster and cheaper broadband ahead. Management highlighted the newly minted authority has reiterated its intention to halve the price of broadband internet while doubling the speed (as pledged in PH’s manifesto for GE14). While the details of the plan have yet to be ironed out, we understand that a new task force is going to be set up in the ministry to study and implement the policy in stages. While the headline impact is likely to be substantial (given the Internet segment accounted for c.36% of the group’s total revenue in 1Q18), the impact to the earnings could be hit progressively due to the progressive implementation.

FY18 KPIs in check. Despite TM reiterated its FY18 KPIs (3.5-4% top- line growth; flattish normalized EBIT growth (at c. RM1.1b); and mid-to- high twenties for the capex/revenue ratio), the tepid 1Q18 performance is likely to keep KPIs in check. On the other hand, the group also reiterates its intention to keep its dividend policy unchanged (RM700m or 90% of normalized PATAMI, whichever is higher).

Slashed FY18E/19E core PATAMI by 22%/13% after incorporating the tepid 1Q18 performance and revised our top-line and OPEX assumptions. Besides, we also raised our taxation rate (to 35% in alignment with management guidance) assumption and reduced our targeted DPS. Correspondently, we have cut our TM DCF-driven target price to RM4.35 (vs. RM6.85 previously) after raising our WACC assumption to 7.7% (vs. 7.2% previously) to account for higher operating risk ahead. With that, we have downgraded our TM’s stock rating to MARKET PERFORM from OUTPERFORM previously.

Source: Kenanga Research - 23 May 2018