1H18 results came in below expectations and the absence of dividend was a negative surprise. Moving forward, TM is set to face challenges post the implementation of MSAP coupled with heightened fixed broadband competition. Post-review, we reduced our FY18-19E earnings by 9-7%. Downgrade to MARKET PERFORM call with lower DCF-driven TP of RM3.55.

Disappointing results. 1H18 core PATAMI of RM261m (-40% YoY) came in below expectations at 39%/36% of our/street’s full-year estimates. The key negative variances on our end were mainly due to higher-than- expected direct costs and effective tax. The core PATAMI was derived after setting aside non-operational items such as unrealized forex impact on borrowings and international trade settlements. No dividend was announced during the quarter, which was a negative surprise as the group tends to reward shareholders semi-annually.

YoY, 1H18 revenue declined by 3% to RM5.8b, due to lower voice (less traffic minutes and cumulative customers), data (lower domestic leased bandwidth and Mandatory Standard of Access Pricing (MSAP) impact of RM88.4m), and other telecommunication-related services (lower USP and customer projects revenue contribution), partially mitigated by an increase in internet revenue (thanks to higher unifi mobile customer base). EBITDA, meanwhile, dropped 11% (as a result of higher OPEX that was mainly driven by higher network (relating to Unifi mobile), A&P, bad & doubtful debts and maintenance costs) with margin lowered to 27.6% vs. 29.9% a year ago. The lower EBITDA coupled with higher effect taxation led the group’s PATAMI to plunge 41% to RM259m. QoQ, turnover improved by 3%, thanks to higher Internet segment contribution. In line with the better revenue coupled with lower OPEX (mainly manpower, supplies & materials and other OPEX) & exclude foreign translation, core PATAMI climbed by 48% to RM156m.

Heightened fixed broadband competition. TM has made its affordable entry-level (unifi basic plan – RM79/month for broadband only plan with speed of 30Mbps and capped at 60GB for the monthly usage) available to all households (vs. to the B40 segment with income of less than RM4500/month previously) from September onwards. While the offer could allow TM to tap into the untapped market (i.e. the non-subscriber M40 segment), it also increases the risk for the existing subscribers to down trade their current subscription plans in view of the huge price gap (vs. current RM179/month for full 3P services). Besides, we also do not discount subscribers may consider switching to its key rival’s offer (MAXIS – unlimited 30Mbps at RM89/month) given the small different in price but with higher value in the latter’s package.

Reiterated FY18 KPIs. The recent regulatory challenges coupled with intensifying competition and macro challenges are set to continue to pose a challenge to the group’s retail and wholesale segment. With that, TM is maintaining its FY18 targets at: (i) -1% to flattish annual revenue growth, (ii) EBIT of RM1.0b and 19-20% capex/revenue ratio. The group also keeping its intention to maintain its dividend policy (RM700m or 90% of normalized PATAMI, whichever is higher). We, however, do not discount that the group may review its dividend policy in the coming quarter in view of the challenges ahead.

Reduced FY18E/FY19E core PATAMI by 9%/7% after incorporating the tepid 1H18 performance and revised our top-line and OPEX assumptions. Besides, we also conservatively change our targeted FY18-19E DPS to 14.5 sen/16.8 sen (vs. 18.6 sen previously) based on 90% pay-out ratio. Correspondently, we have cut our TM DCF-driven target price from RM4.00 to RM3.55 (after raising our WACC assumption to 8.4% vs. 8.0% previously to account for challenges post the MSAP coupled with heightened fixed broadband competition) and downgraded the stock rating to MARKET PERFORM from OUTPERFORM previously. Risks to our call include: (i) unfavourable change in regulation, (ii) stiffer fixed broadband competition, and (iii) higher-than-expected OPEX.

Source: Kenanga Research - 30 Aug 2018