1H19 core PATAMI of RM523.3m (+100% YoY) and absence of dividends came as expected. The group sees challenges across its voice and internet revenue streams, but will reap earnings growth from cost rationalisation initiatives. The latter has stirred excitement in the stock’s price, which we believe had the positives well priced in at current levels. Having already performed well, we downgrade to MP but maintain our DCF-driven TP of RM3.95 (based on WACC: 9.7%, TG: 1.5%).

1H19 came stronger, as expected. 1H19 core PATAMI of RM523.2m made up 62% and 60% of our and consensus respective full-year estimates. 2H period earnings are expected to be softer as investmentheavy roll-outs could bump up operating expenses. No dividend was announced, as expected.

YoY, 1H19 revenue dipped by 4% to RM5.55b, seeing lower contributions from voice (-9% on both lower usage and customer base) and internet demand (-7%, weaker Streamyx performance cushioned by improvements in Unifi). On the other hand, the demand for data saw an uptick driven by a better share from TM Global’s wholesale and TM One’s private domestic network segments. Operationally, 1H19 normalised EBIT swelled to RM900.4m (+108%), materialising from its Performance Improvement Program (PIP) to drive cost efficiencies. This translated to a core PATAMI of RM523.2m (+100%), after adjusting for one-off items (mainly impairments on its network assets for Streamyx).

QoQ, 2Q19 top-line was stagnant, similarly a result of softer voice and internet business but made up by higher data contributions. However, core PATAMI registered at RM226.8m (-24%) as the quarter saw higher overall expenses, typically seen progressively during later periods.

Laying the bricks. Post-2Q19 results, management remains firm in delivering per its FY19 guidance, being: (i) keeping revenue decline at low to mid-single digit levels, and (ii) registering normalised EBIT greater than FY18 of c.RM1.0b. At the meantime, sticking with the targeted capex spend of 18% of revenue in FY19 would mean a highly aggressive ramping in network infrastructure during 2H19, which could include upgrading its copper network. At present, we believe the group could well deliver its guidance as the PIP appears to continue demonstrating sustainable results. This could sufficiently buffer top-line challenges with pressures to provide more accessible products to the broader consumer market.

Post-results, we made minor tweaks to our FY19E/FY20E numbers as we incorporate 2Q19’s results numbers.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged DCF-driven TP of RM3.95. Our target price (based on WACC: 9.7%, TG: 1.5%) implies an EV/Fwd. EBITDA of 5.5x against our FY20E earnings. Post-1Q19 results, sentiment for the stock surged in anticipation of promised earnings expansion from TM’s cost saving efforts. However, we believe that the potential has been well priced in, factoring in expectations for guided weaker sequential quarterly results going forward.

Risks to our call include: (i) better/weaker-than-expected voice and internet demand, (ii) changes in regulations, and (iii) higher/lower-thanexpected operating expenses.

Source: Kenanga Research - 29 Aug 2019