FY19 CNP of RM1.00b (+58%) was as anticipated but full-year dividends of 11.5 sen came below our expectation. Management guides for a continuing decline in revenue for FY20 with EBIT to be sustained at recent years’ benchmark (>RM1.0b). The group is expected to gain subscribers as national connectivity strengthens albeit with ARPU dilution. Successful participation in building the national 5G infrastructure could be a positive to the group. Maintain OP and DCF-driven TP of RM4.30 (WACC: 9.1%, TG: 1.5%).

FY19 within expectations. FY19 core PATAMI of RM1.00b is within our/consensus expectations, making up 102% of both full-year estimates. A final dividend of 10.0 sen was declared. However, this missed our 11.5 sen expectation as we had anticipated for a more generous payout of above 60%.

YoY, FY19 revenue declined by 3% to RM11.43b. Voice segment revenue fell by 11% from the diminishing demand for traffic minutes while Internet revenue (-7%) was affected by lower price adjustments from Streamyx in Jul 2019. Meanwhile, Data revenue (+17%) was backed by more domestic wholesale agreements at TM Global. Normalised EBIT came in at RM1.70b (+59%) with improvement mainly stemming from lower direct costs thanks to optimisation from the group’s Performance Improvement Program. This then translated to a FY19 core PATAMI of RM1.00b (+58%) after adjusting for fair value losses in financial instruments of RM233.7m. Comparing 4QFY19 against 4QFY18, Streamyx subscribers decreased by 21% to 786k users with a lower ARPU of RM96/mth (from RM113/mth) following the repricing of Streamyx products in Jul 2019. Unifi saw increased subscribers at 1.44m users (+11%) but with softer ARPU of RM153/mth (from RM177/mth) due to the same reasons.

QoQ, 4QFY19 revenue rose by 6% on better wholesale Data demand during the period. However, core PATAMI declined by 34% sequentially as operating expenses were higher from a greater ramping of capex in 4Q periods.

Laying out the future. For FY20, management anticipates revenue to again see a low-to-mid single-digit decline (FY19: -3%). With the NFCP, we believe that the group would continue to see growth in its highspeed broadband business (unifi) from wider national connectivity. That being said, ARPU could be threatened by ongoing adjustments and agendas to provide affordable packages to the public (1% of GNI by 2020, c.RM40/month). However, it is likely that the lower price point may also indicate lower speeds and may not see a high uptake, save for the rural and underserved areas. FY20 EBIT guidance of above RM1.0b would be within the group’s last two years’ performance (RM1.0b-RM1.7b). The group possess credentials as probably the candidate best endowed in building our national 5G infrastructure, tapping on its nationwide fibre network. To date, the group has collaborated with several government agencies and businesses to showcase its capabilities, most recently in the Langkawi 5G trial. We anticipate further development on the formation of bidding 5G consortiums in the coming weeks, in which TM would be actively involved.

Post-results, we introduce our FY21E numbers.

Maintain OUTPERFORM and DCF-driven TP of RM4.30. Our TP is premised on a WACC assumption of 9.1% and 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 5G ambitions could be a rerating catalyst for the group.

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 - 24 Feb 2020