1HFY20 normalised earnings of RM698m (-12%) and 4.0 sen interim dividend declared are deemed within expectations. The group was successful in preventing major dips in subscribers and ARPU numbers during the MCO period with well-received offerings, one being its new “Unlimited” Prepaid plan. Capex spending to maintain network quality will likely remain undeterred with converged solutionsbeing a forefront approach. Maintain MP and DCF-driven TP of RM4.90 (WACC: 8.8%, TG: 1.5%).

1HFY20 deemed within. 1HFY20 normalised profit of RM698m is deemed to be in line with our/consensus estimates, making up 46%/48% of respective expectations. We anticipate a lumpier 2HFY20 as the recent period have been impeded by the MCO enforcement. An interim dividend of 4.0 sen (YTD: 8.0 sen) is also deemed to be within our expectations, against our 20.0 sen total FY20E payment (in line with 3-year historical trends, ranging from 75-105% payout ratios).

YoY, 1HFY20 total revenue came in at RM4.49b (+1%) but service revenue declined by 1% at RM3.84b as a fall in mobile revenue (-6%) was lifted by stronger enterprise and home fibre revenues. Segment-wise, Prepaid revenue (- 12%) continued to decline with line deactivations stirred by the MCO and migration to Postpaid, which remains somewhat buoyed (-1%). As of 2QFY20, Prepaid subscribers came in at 5.98m with an ARPU of RM40/mth (2QFY19: 6.42m users, ARPU: RM41/mth) while Postpaid subscribers registered at 3.69m users with an ARPU of RM85/mth (2QFY19: 3.36m users, ARPU: RM91/mth). Overall, normalised earnings fell by 12% to RM698m on greater depreciation from focused rollouts and more prudent impairments amidst Covid-19 pandemic.

QoQ, 2QFY20 service revenue was 2% lower as the MCO led higher Prepaid growth while Postpaid subscriber base and ARPU declined. While customer acquisition was softer, the launch of new “Unlimited” Prepaid plans attracted great consumer interest. In line with the lower topline, 2QFY20 normalised profit closed at RM338m (-6%).

Hanging on steadily. Despite concerns of ARPU dilution, the group has stayed relatively unscathed thanks to its strong move to provide converged solutions and maintaining its network quality. We see the move to provide lower entry Postpaid plans and “Unlimited” Prepaid plans as addressing the possible changes in consumer appetite for more value propositions. On this matter, management believes erosion of shareholder’s value would not be a concern as this strategy could be a means to reach out to untapped markets. Meanwhile, it will continue to stay prudent and to focus on cash management and liquidity until a time when the implications of Covid-19 are more manageable. Though no new set of guidance has been disclosed, our estimates translate to a flat-to-low single-digit decline in service revenue but a flat-to-low single-digit increase in EBITDA.

Post-results, we leave our FY20E/FY21E assumptions relatively unchanged. Recall that we had previously adjusted our assumptions during 1QFY20 Results Note by -7.2%/-6.5% in anticipation of economic headwinds.

Maintain MARKET PERFORM and DCF-driven TP of RM4.90. We maintain our DCF assumptions (WACC: 8.8%, TG: 1.5%), closely within the stock’s 3-year average of its 12.0x EV/Fwd. EBITDA. The stock’s sustainable projections could be well-priced in at current price levels. While this may keep dividend prospects intact, it remains only slightly above industry average of 3%.

Risks to our call include: (i) higher/lower-than-expected service revenue growth, (ii) lower/higher-than-expected OPEX, and (iii) less/more aggressive competition

Source: Kenanga Research - 24 Jul 2020