9MFY19 exceeded expectations. 9MFY19 core PATAMI of RM810.9m is above our/consensus full-year estimates, accounting for 95%/88% respectively. Despite revenue coming in at 75% of full-year assumptions, the positive deviation came largely from more streamlined operating expenses (i.e. marketing, maintenance). No dividend was announced, as expected.

YoY, 9MFY19 revenue trickled to RM8.40b (-4%) as a shrinking customer base led to lower voice (-10%) and internet (-7%) usage. Data revenue, however, remained sturdy (+13%) thanks to TM Global’s domestic wholesale agreements. The improved normalised EBIT of RM1.32b (+77%) was sparked by the group’s Performance Improvement Program (PIP) cutting redundancies. Consequently, core PATAMI came in at RM810.9m (+54%) after adjusting for one-off items (mainly impairments on its Streamyx network assets).

Comparing 3QFY19 against 3QFY18, Streamyx subscribers decreased by 28% to 786k users with a lower ARPU of RM111/mth (from RM113/mth) due to a migration to Unifi packages. Unifi saw increased subscribers at 1.37m users (+9%) but with softer ARPU of RM167/mth (from RM186/mth) on lower revised prices.

QoQ, 3QFY19 revenue increased by 3% as flattish contributions from key segments was bolstered by its non-telco service contributions, partly from proceeds from a one-off land sale. Similar to the above, 3QFY19 core PATAMI rose by 27% to RM287.7m.

5G? Mobile? Although only clocking 8.8% of revenue for its YTD- capex spend, management believes its earlier guidance for 18% of FY19 revenue would only miss slightly. On this, management appears steadfast with its intention to be the national infrastructure provider for the eventual 5G network, while also keeping an eye on upgrading its existing networks (i.e. copper). The group has signed a MoU with Huawei to accelerate 5G readiness and aims to host 5G demonstrations in selected townships in the coming months. Management also aspires for a piece of the 700MHz spectrum, which should boost its mobile efforts. As the national rollout of 5G is still a couple of years ahead, TM will still need to weather through the softening voice and internet services market. Though improvements in network service, coverage and affordability demanded by the NFCP could further dent this, we take comfort that savings wrought by PIP could help to sustain earnings in the interim.

Post-results, we raise our FY19E/FY20E earnings by 15%/17% mainly on less conservative cost assumptions.

Maintain OUTPERFORM with a higher DCF-driven TP of RM4.30 (from RM3.95, previously). Our higher TP is premised on higher WACC assumption of 9.1% (from 9.5%) but a maintained TG of 1.5%. This implies an EV/Fwd. EBITDA of 5.5x against our FY20E earnings. Save for possible structural changes to its business direction, the group sits on a compelling fundamental platform to ride through industry headwinds. We do not discount that the realisation of its mobile and 5G ambitions could be a re-rating catalyst for the group.

Source: Kenanga Research - 27 Nov 2019