TM was impacted by persistent headwinds in the industry and operating landscape throughout 2018. Moving forward, the group is set to accelerate convergence and empower digital in line with its transformation that reinforces customer centricity. Post-review, we nudged our FY19E NP by -1%. Maintain DCF-driven TP at RM2.50 but downgrade the stock rating to UNDERPERFORM.

Below our estimate but in-line with consensus. FY18 core PATAMI of RM632m (-27% YoY) came in below our estimate (at 92%) but within street’s full-year estimate (at 105%). The key negative variance on our end was mainly due to higher-than-expected finance cost. A lower-than- expected 2.0 sen (vs. our 2.6 sen) DPS was announced, translating into 49.3% dividend payout (in-line with TM’s dividend policy of 40%-60% of reported PATAMI).

YoY, FY18 revenue declined by 2% to RM11.8b, due to lower voice (-5% to RM3.0b, fewer traffic minutes and cumulative customers) and data (-9% to RM2.4b, lower domestic leased bandwidth post the implementation of MSAP) segments’ contribution, partially mitigated by an increase in internet revenue (+4% to RM4.1b, thanks to larger Unifi customer base and higher buys-in of Unifi TV content). EBITDA, meanwhile, dipped 3% (as a result of higher OPEX mainly driven by higher network (relating to Unifi mobile), bad & doubtful debts and maintenance costs) with margin lowered to 29.0% (-20bps). QoQ, turnover improved by 5% to RM3.1b while EBITDA was lower by 3% (mainly driven by higher direct and supplies & materials cost). Its reported PATAMI, meanwhile, improved to RM70m (vs.-RM176m in 3Q18) with the absence of impairment loss on network assets recognized in the preceding quarter.

Transform into a “New TM” that reinforces customer centricity. While TM continues to expect the operational environment to remain challenging, the group is set to accelerate Convergence and empower Digital in line with its transformation that reinforces Customer Centricity. Over the next 3 year, TM is set to focus on 3 strategic pillars – converged services (solidifying convergence position and vertical focus to serve industries going digital), simplification & digitalization (product rationalization as well as simplify process & digitalization), and lean & lower cost (focus on core business & cost optimization), with its integrated network infrastructure to bring a convergence digital lifestyle to all Malaysians.

Introduced FY19 KPIs, where it is aiming to achieve a low to mid-single digit revenue decline (due to softer voice, data and managed services) but keeping its normalized EBIT target similar to FY18 level (at c.RM1b, as a result of continued cost optimization). Capex/revenue ratio, meanwhile, is expected to come in at 18-20%. All in, while we concur with management guidance for now, the group’s outlook and competition landscape is expected continue to remain challenging with peers getting more aggressive to penetrate into TM’s core segments.

Minor tweak to FY19E PATAMI by -1% to RM610m, post the result review and introduced our FY20 numbers, where we expect TM to record relatively flat top-line and bottom-line growth. Key earnings assumptions for FY19/20E include: (i) Unifi/Streamyx ARPU of RM168/RM81 & RM152/RM75, (ii) Unifi subscribers’ net add of 140k each, and (iii) 18-20% capex/revenue ratio.

Downgrade to UP (vs. MP previously) with an unchanged DCF-driven TP of RM2.50 (WACC: 9.6%, TG: 1%). TM’s share price has gained 14% YTD; with limited key earnings catalyst coupled with an uninspiring dividend yield of c.2% and heightened competition, we advocate investors to sell on strength.

Downside risks to our call include: (i) unfavourable change in regulation, (ii) stiffer fixed broadband competition, and (iii) higher-than- expected OPEX. On the flip side, upside risks to our call include: (i) favourable regulation framework, and (ii) stronger-than-expected top-line and margin growth.

Source: Kenanga Research - 27 Feb 2019