1QFY20 normalised earnings of RM240.8m (-19%) missed our estimate as we were less pessimistic on revenue declines. Data demand has been elevated with the Covid-19 pandemic, but the enterprise segment could be adversely affected, prompting a cut to our FY20E/FY21E earnings by 14%/10%. Although we see some excitement from its possible re-entry into the FBMKLCI, this could only be a short-term booster. Hence, we downgrade our call to MP and lower our DCF-driven TP to RM4.20 (WACC: 9.5%, TG: 1.5%).

1QFY20 normalised PATAMI of RM240.8m missed our expectations but is within consensus, amounting to 23%/28% of respective full-year expectations. We had anticipated a stronger 1HFY as 2HFYs are typically dragged by higher opex. The negative deviation was due to our overly-bullish revenue assumptions, underestimating the decline in voice and internet revenues. No dividend was declared in this quarter, as expected.

YoY, 1QFY20 revenue declined by 8% owing to weakness across all segments. Voice revenue fell by 19% from diminishing customer base and demand for traffic minutes. Meanwhile, lower internet contributions (-4%) is attributed to lower ARPU from Streamyx following 2019 price adjustments while data revenue (-5%) was affected by lower pre-MCO network demand. Normalised EBIT fell by 35% owing to the abovementioned softer top-line. That said, the group has successfully kept opex flattish, with savings in direct costs and maintenance offset by higher depreciation charges. On the back of lower effective taxes during the quarter, 1QFY20 normalised PATAMI came in at RM240.8m (-19%).

QoQ, 1QFY19 revenue fell by 16% mainly due to similar reasons mentioned above. However, internet revenue was stronger (+3%) on the back of a larger unifi subscriber base. Thanks to a better cost environment, normalised profit grew by 27%.

Helping us to stay home. The group is likely to be busy clearing a backlog of installation requests in the coming months, stemming from the surge of online registrations during the MCO and the only recent re-opening of its TM Point outlets. Demand for data will likely be on the rise given the increase in work-from-home set-ups. The migration to fibre-based unifi will continue as consumer demand for faster and more stable internet. Though, there will likely be challenges on the enterprise/SME businesses dragged by the economic slowdown from the MCO, which we believe may pose some default risks. On the flipside, management continues to strive for a leaner cost structure with constant renegotiations and retraining of staff to be sales oriented, to adapt in a slowing economy. Meanwhile, the group persists with its 5G ambition, albeit delayed with MCMC refocusing its priorities to Covid- 19-related efforts. The previous FY20E guidance; (i) revenue low-mid single digit decline (FY19: -3.3%), and (ii) EBIT more than RM1b (FY19: RM1.57b) is being reviewed by management, similar to other telcos.

Post-results, we cut our FY20E/FY21E earnings by 14%/10% as we tone down our revenue assumptions across all segments.

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower DCF driven TP of RM4.20 (from RM4.30). Our DCF is premised on a WACC assumption of 9.5% and TG of 1.5%, implying EV/Fwd. EBITDA of 5.2x against FY21E earnings. Currently, we believe TM’s prospects are well-priced in, especially with challenges wrought by the Covid-19 pandemic. That said, the group is a likely inclusion into the FBMKLCI in the upcoming June review given its current market cap. We believe investors are also aware of this which could prove to be a positive short-term rerating catalyst for the stock should it materialise. However, we anticipate the stock could see a correction should it faces more challenges in the medium-term.

Source: Kenanga Research - 21 May 2020