Despite better-than-expected operational performance in 3Q18, PATAMI slipped into the red after a one-off impairment loss on network assets. Its dividend policy was also reviewed. Moving forward, TM is set to face a tough operational landscape post the implementation of MSAP and regulation headwinds. Post-review, we tweaked our FY18E/FY19E earnings by +14%/-12%. Maintain MARKET PERFORM call with lower DCF-driven TP of RM2.50.

Above expectations. 9M18 core PATAMI of RM527m (-18% YoY) came in above expectations at 88%/87% of our/street’s full-year estimates. The key positive variances on our end were mainly due to lower-than-expected direct and marketing expenses in 3Q18. No dividend was announced during the quarter, as expected.

YoY, 9M18 revenue declined by 2% to RM8.7b, due to lower voice (-7.4% to RM2.2b, fewer traffic minutes and cumulative customers), and data (- 9.2% to RM1.8b, lower domestic leased bandwidth post the implementation of Mandatory Standard of Access Pricing (MSAP)) segments’ contribution, partially mitigated by an increase in internet revenue (+5.4% to RM3.1b, thanks to higher unifi TV premium channel buys and customer base in unifi mobile) and other telecommunications related services (+2.6% to RM1.6b as a result of higher customer projects). EBITDA, meanwhile, dipped 5% (as a result of higher OPEX that was mainly driven by higher network (relating to Unifi mobile), bad & doubtful debts and maintenance costs) with margin lowered to 28.9% (- 100bps). QoQ, turnover stabled at RM2.9b while EBITDA improved by 11% (mainly driven by lower direct and marketing costs as a result of its cost reduction initiatives). Despite better operational performance, its reported PATAMI plunged into red (to –RM176m) after undertaking a one- off RM995m impairment loss on network assets. The decision was made after management took a prudent view, in light of the heightened challenges in operating environment.

Revised dividend policy. In view of the continued operational challenges, TM has revised its dividend policy to distribute yearly dividends of 40% to 60% of its reported PATAMI (vs. RM700m or 90% of normalized PATAMI, whichever is higher, previously). The revised policy is set to be effective from FY18 onwards.

Reiterated FY18 KPIs. TM is maintaining its FY18 targets; (i) -1% to flattish annual revenue growth, (ii) EBIT of RM1.0b and 19-20% capex/revenue ratio, despite the recent regulatory challenges coupled with intensifying competition and macro challenges continuing to pose a great challenge to the group’s retail and wholesale segments.

Tough operational landscape. The authority’s intentions on making broadband a necessity coupled with the revised MSAP framework and rising risk of subscription plans down-trading are set to pose tremendous risks to TM’s earnings prospect. Besides, the recent leadership change coupled with the potential exclusion from the FBMKLCI could also add to the uncertainties.

Raised FY18E earnings but cut FY19E earnings. We have raised our FY18E PATAMI by 13.5% after incorporating the better-than-expected 3Q18 performance. Moving into FY19, we have trimmed our core earnings by 12% after factoring in: (i) lower unifi/pre-unifi ARPU (to RM174/RM79 vs. RM180/RM86 previously) as a result of higher propensity of subs down-trading, (ii) lower broadband subscribers, and (iii) steeper competition.

Maintained MP but with a lower DCF-driven TP of RM2.50 (vs. RM3.10 previously), post the result review. Our DCF assumptions now incorporate an unchanged WACC of 9.4% but with a lower TG of 1.0% (vs. 1.5% previously) to reflect regulatory risks and uncertainties. Besides, we also lowered our FY18E/FY19E DPS to 2.6 sen/6.5 sen (vs. 14.6 sen/16.8 sen previously), respectively, based on the 40% payout ratio on its reported PATAMI. Risks to our call include: (i) unfavourable change in regulation, (ii) stiffer fixed broadband competition, and (iii) higher-than-expected OPEX.

Source: Kenanga Research - 27 Nov 2018