TM’s 2H19 could see top-line weakness on lower ARPU from new product pricing, in our view. Better cost structures should persist, albeit at a slower scale than 1H19 on back-loaded operations. We believe its shares sell-down triggered by mobile-related news could be overdone, as we believe any near-term implementation and the scale would not be materially impactful. Maintain OP and DCF-driven TP of RM3.95 (WACC: 9.5%, TG: 1.5%).

Tightrope for top-line. In the recent 1H19 results, revenue decline of 4% YoY was mainly caused by lower voice and internet demand (fewer Streamyx subscribers but buffered a growing Unifi base). We believe the guidance for a low to mid-single digit decline in FY19 should still hold, as demand for main products will likely be weaker on stiffer competition. With new pricings being offered since Sep 2019 heeding the government’s call to make internet more assessable, it will be interesting to see the consumers’ response towards the brand. However, this could dent ARPU numbers in 2H19 (vs. 2Q19 Streamyx @ RM86/user and Unifi @ RM177/user). That said, the commissioning of customer projects in 2H could offer some revenue support.

Cost snipping. Yield from the Performance Improvement Plan (PIP) should continue to trickle into 2H19 results, albeit at a lower rate than 1H19 due to the group typically being operationally back-loaded. Recall that 1H19 registered opex improvements of 11%, which translated to EBIT of RM777.9m (+75% YoY) and margin of 14.0% (+6.3ppt). We are banking on margin to persist at this robust level, but caution that 2H projects could undermine direct costs. At the meantime, the abovementioned compressed ARPU could also contribute to weaker margins. Nonetheless, we believe it would be highly unlikely for the group to miss its FY19 EBIT guidance of being better than FY18.

Finding the right way forward. Market has been abuzz on the recent news that the group is looking to venture aggressively into mobile. We believe that a likely hurdle in its implementation could be the upcoming assignment by MCMC of the 700MHz, 2300MHz and 2600MHz spectrums by 2H20. However, do recall that its mobile business has been operational since Jan 2018 and thus not an entirely new venture for the group. Also, during the recent MCMC Public Inquiry, the group expressed itself as suitable for allocation of the entire spectrum blocks to facilitate 5G in the future owing to their extensive nationwide fibre coverage. However, reiterating views from our 10 Sep 2019 sector report “Spectrum Inquiry; The Word is Out”, we believe that condensing spectrum licenses may not make the most commercial sense as it does not give other operators an equal ground to experiment the most efficient use of the spectrums. Additionally, monopolistic issues may arise.

Maintain OUTPERFORM and DCF-driven TP of RM3.95. Our target price (based on WACC: 9.5%, TG: 1.5%) implies an EV/Fwd. EBITDA of 5.5x against our FY20E earnings, with no changes to our FY19E/FY20E assumptions in this note. We had earlier re-rated the stock from MARKET PERFORM in our above mentioned sector update. Reiterating our call premise, we believe the share price weakness following the management’s expression to branch aggressively into mobile could be overdone. Any loss of cost savings could be exaggerated as its existing mobile business has been operational since Jan 2018, and granted the scale, it may not incur as significant amount in start-up costs.

Risks to our call include: (i) weaker-than-expected voice and internet demand, (ii) stronger -than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 19 Sept 2019